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Dollar Tree, Inc. logo
Dollar Tree, Inc.
DLTR · US · NASDAQ
92.37
USD
-0.08
(0.09%)
Executives
Name Title Pay
Mr. Robert Andrew LaFleur Senior Vice President of Investor Relations --
Mr. Lawrence J. Gatta Jr. Chief Merchandising Officer of Family Dollar Banner 1.36M
Mr. Aditya Maheshwari Senior Vice President & Chief Accounting Officer --
Mr. Robert Aflatooni Chief Information Officer --
Mr. Michael C. Creedon Jr. Chief Operating Officer 2.2M
Mr. H. Ray Compton Co-Founder 77.5K
Mr. Jonathan B. Leiken Chief Legal Officer & Secretary --
Mr. Richard W. Dreiling Executive Chairman & Chief Executive Officer 3.36M
Mr. Jeffrey A. Davis BS, EMBA Chief Financial Officer 1.55M
Mr. Richard L. McNeely Chief Merchandising Officer 1.86M
Insider Transactions
Date Name Title Acquisition Or Disposition Stock / Options # of Shares Price
2024-08-01 Stahl Stephanie director A - C-Conversion Common Stock 1185 0
2024-08-01 Stahl Stephanie director D - C-Conversion Phantom Stock 1185 0
2024-06-30 Maheshwari Aditya Chief Accounting Officer A - J-Other Common Stock 70 90.75
2024-04-01 Maheshwari Aditya Chief Accounting Officer A - A-Award Common Stock 1564 0
2024-03-31 Maheshwari Aditya Chief Accounting Officer A - J-Other Common Stock 81 113.18
2023-10-27 Maheshwari Aditya Chief Accounting Officer A - A-Award Common Stock 3754 0
2024-04-01 Maheshwari Aditya Chief Accounting Officer A - A-Award Stock Option (right to buy) 1078 135.91
2023-10-27 Maheshwari Aditya Chief Accounting Officer A - A-Award Stock Option (right to buy) 662 108.24
2023-09-05 Maheshwari Aditya officer - 0 0
2024-07-05 Gatta Lawrence J. Jr. Chief Merchandising Officer FD A - A-Award Common Stock 14060 0
2024-07-05 Kindy Michael J Chief Supply Chain Officer A - A-Award Common Stock 14060 0
2024-07-01 Randolph Diane director A - A-Award Phantom Stock 1398.6 0
2024-07-01 Stahl Stephanie director A - A-Award Phantom Stock 1398.6 0
2024-07-01 Stahl Stephanie director A - A-Award Phantom Stock 419.58 0
2024-07-01 SCOTT BERTRAM L director A - A-Award Phantom Stock 1398.6 0
2024-07-01 Park Winifred director A - A-Award Phantom Stock 1398.6 0
2024-07-01 Park Winifred director A - A-Award Phantom Stock 349.65 0
2024-07-01 NAYLOR JEFFREY G director A - A-Award Phantom Stock 1398.6 0
2024-07-01 Laschinger Mary A director A - A-Award Phantom Stock 1398.6 0
2024-07-01 KELLY EDWARD J III director A - A-Award Phantom Stock 1398.6 0
2024-07-01 KELLY EDWARD J III director A - A-Award Phantom Stock 349.65 0
2024-07-01 HEINRICH DANIEL J director A - A-Award Common Stock 1398 107.25
2024-07-01 GRISE CHERYL W director A - A-Award Phantom Stock 1398.6 0
2024-07-01 GRISE CHERYL W director A - A-Award Phantom Stock 431.24 0
2024-06-28 Kindy Michael J Chief Supply Chain Officer D - F-InKind Common Stock 294 106.77
2024-07-01 Gatta Lawrence J. Jr. Chief Merchandising Officer FD D - F-InKind Common Stock 812 107.25
2024-06-25 Aflatooni Robert Chief Information Officer D - S-Sale Common Stock 827 105.58
2024-03-31 NAYLOR JEFFREY G director A - C-Conversion Common Stock 1898 0
2024-03-31 NAYLOR JEFFREY G director D - C-Conversion Phantom Stock 1898 0
2024-04-01 McNeely Richard L CMO - Dollar Tree A - A-Award Common Stock 4856 0
2024-04-01 McNeely Richard L CMO - Dollar Tree A - A-Award Stock Option (right to buy) 7433 135.19
2024-04-01 Leiken Jonathan Chief Legal Officer A - A-Award Common Stock 3531 0
2024-04-01 Leiken Jonathan Chief Legal Officer A - A-Award Stock Option (right to buy) 5406 135.91
2024-04-01 Kindy Michael J Chief Supply Chain Officer A - A-Award Common Stock 3090 0
2024-04-01 Kindy Michael J Chief Supply Chain Officer A - A-Award Stock Option (right to buy) 4730 135.91
2024-04-01 Hulett Jennifer Chief Human Resources Officer A - A-Award Common Stock 3090 0
2024-04-01 Hulett Jennifer Chief Human Resources Officer A - A-Award Stock Option (right to buy) 4730 135.91
2024-04-01 Gatta Lawrence J. Jr. Chief Merchandising Officer FD A - A-Award Common Stock 4856 0
2024-04-01 Gatta Lawrence J. Jr. Chief Merchandising Officer FD A - A-Award Stock Option (right to buy) 7433 135.91
2024-04-01 Davis Jeffrey A. Chief Financial Officer A - A-Award Common Stock 5518 0
2024-04-01 Davis Jeffrey A. Chief Financial Officer A - A-Award Stock Option (right to buy) 8447 135.91
2024-04-01 Creedon Michael C Jr Chief Operating Officer A - A-Award Common Stock 8277 0
2024-04-01 Creedon Michael C Jr Chief Operating Officer A - A-Award Stock Option (right to buy) 12671 135.91
2024-04-01 Aflatooni Robert Chief Information Officer A - A-Award Common Stock 3752 0
2024-04-01 Aflatooni Robert Chief Information Officer A - A-Award Stock Option (right to buy) 5744 135.91
2024-04-01 KELLY EDWARD J III director A - A-Award Phantom Stock 275.92 0
2024-04-01 GRISE CHERYL W director A - A-Award Phantom Stock 340.3 0
2024-04-01 Stahl Stephanie director A - A-Award Phantom Stock 331.1 0
2024-04-01 Park Winifred director A - A-Award Phantom Stock 275.92 0
2024-03-31 Hulett Jennifer Chief Human Resources Officer D - F-InKind Common Stock 252 133.15
2024-04-01 Hulett Jennifer Chief Human Resources Officer D - F-InKind Common Stock 436 135.91
2024-03-31 McNeely Richard L CMO - Dollar Tree D - F-InKind Common Stock 691 133.15
2024-04-01 McNeely Richard L CMO - Dollar Tree D - F-InKind Common Stock 1176 135.91
2024-03-31 Gatta Lawrence J. Jr. Chief Merchandising Officer FD D - F-InKind Common Stock 462 133.15
2024-04-01 Davis Jeffrey A. Chief Financial Officer A - P-Purchase Common Stock 1800 135.9969
2024-03-31 Davis Jeffrey A. Chief Financial Officer D - F-InKind Common Stock 472 133.15
2024-03-31 Creedon Michael C Jr Chief Operating Officer D - F-InKind Common Stock 546 133.15
2024-03-31 Aflatooni Robert Chief Information Officer D - F-InKind Common Stock 357 133.15
2024-03-19 McNeely Richard L CMO - Dollar Tree A - A-Award Common Stock 8252 0
2024-03-19 McNeely Richard L CMO - Dollar Tree D - F-InKind Common Stock 3099 128.19
2024-03-16 McNeely Richard L CMO - Dollar Tree D - F-InKind Common Stock 1101 127.42
2024-03-18 HEINRICH DANIEL J director A - P-Purchase Common Stock 1000 127.85
2024-02-25 Hulett Jennifer Chief Human Resources Officer D - F-InKind Common Stock 241 145.88
2023-07-01 Gatta Lawrence J. Jr. Chief Merchandising Officer FD D - F-InKind Common Stock 712 143.5
2024-01-01 Stahl Stephanie director A - A-Award Phantom Stock 457.59 0
2024-01-01 KELLY EDWARD J III director A - A-Award Phantom Stock 263.99 0
2024-01-01 GRISE CHERYL W director A - A-Award Phantom Stock 325.59 0
2024-01-01 Park Winifred director A - C-Conversion Common Stock 1139 0
2024-01-01 Park Winifred director A - A-Award Phantom Stock 263.99 0
2024-01-01 Park Winifred director D - C-Conversion Phantom Stock 1139 0
2023-11-25 Davis Jeffrey A. Chief Financial Officer D - F-InKind Common Stock 1990 117.32
2023-12-20 Mantle Ridge LP A - P-Purchase Common Stock 60557 135.35
2023-12-20 Mantle Ridge LP A - P-Purchase Common Stock 557788 134.43
2023-12-20 Mantle Ridge LP A - P-Purchase Common Stock 112103 133.68
2023-12-20 Mantle Ridge LP A - P-Purchase Common Stock 8414 132.65
2023-12-19 Mantle Ridge LP A - P-Purchase Option for Cash Settled Forward Contracts 6231104 81
2023-12-19 Mantle Ridge LP A - P-Purchase Option for Cash Settled Forward Contracts 2501339 98
2023-12-19 Mantle Ridge LP A - P-Purchase Physically Settled Options to Buy Common Stock 900360 98
2023-12-19 Mantle Ridge LP A - P-Purchase Physically Settled Options to Buy Common Stock 636151 81
2023-12-19 Mantle Ridge LP D - S-Sale Option for Cash Settled Forward Contracts 2160401 70
2023-12-19 Mantle Ridge LP D - S-Sale Physically Settled Options to Buy Common Stock 252460 75
2023-12-19 Mantle Ridge LP D - S-Sale Physically Settled Options to Buy Common Stock 116250 70
2023-12-19 Mantle Ridge LP D - S-Sale Option for Cash Settled Forward Contracts 1753655 55
2023-12-19 Mantle Ridge LP D - S-Sale Option for Cash Settled Forward Contracts 301800 60
2023-11-25 Davis Jeffrey A. Chief Financial Officer D - F-InKind Common Stock 1326 117.32
2023-11-25 Creedon Michael C Jr Chief Operating Officer D - F-InKind Common Stock 841 117.32
2023-10-27 Leiken Jonathan Chief Legal Officer A - A-Award Common Stock 4573 0
2023-10-27 Leiken Jonathan Chief Legal Officer A - A-Award Stock Option (right to buy) 2697 108.24
2023-10-11 Aflatooni Robert Chief Information Officer D - S-Sale Common Stock 1259 107.0325
2023-10-01 GRISE CHERYL W director A - A-Award Phantom Stock 434.48 0
2023-10-01 HEINRICH DANIEL J director A - A-Award Phantom Stock 187.88 0
2023-10-01 KELLY EDWARD J III director A - A-Award Phantom Stock 352.28 0
2023-10-01 NAYLOR JEFFREY G director A - A-Award Phantom Stock 223.11 0
2023-10-01 Park Winifred director A - A-Award Phantom Stock 352.28 0
2023-10-01 Stahl Stephanie director A - A-Award Phantom Stock 422.73 0
2023-10-01 Randolph Diane director A - A-Award Phantom Stock 1239.25 0
2023-09-22 HEINRICH DANIEL J director A - P-Purchase Common Stock 1650 105.24
2023-08-28 Leiken Jonathan officer - 0 0
2023-08-26 Aflatooni Robert Chief Information Officer D - F-InKind Common Stock 543 123.31
2023-08-15 Randolph Diane director D - Common Stock 0 0
2023-08-01 Stahl Stephanie director A - C-Conversion Common Stock 2904 0
2023-08-01 Stahl Stephanie director D - C-Conversion Phantom Stock 2904 0
2023-07-01 Park Winifred director A - A-Award Common Stock 1045 143.5
2023-07-01 Park Winifred director A - A-Award Phantom Stock 261.32 0
2023-07-01 Stahl Stephanie director A - A-Award Phantom Stock 1045.3 0
2023-07-01 Stahl Stephanie director A - A-Award Phantom Stock 313.59 0
2023-07-01 SCOTT BERTRAM L director A - A-Award Phantom Stock 1045.3 0
2023-07-01 NAYLOR JEFFREY G director A - A-Award Phantom Stock 1045.3 0
2023-07-01 NAYLOR JEFFREY G director A - A-Award Phantom Stock 165.51 0
2023-06-30 Kindy Michael J Chief Supply Chain Officer A - A-Award Stock Option (right to buy) 4575 143.5
2023-06-30 Kindy Michael J Chief Supply Chain Officer A - A-Award Common Stock 2926 0
2023-07-01 Laschinger Mary A director A - A-Award Phantom Stock 1045.3 0
2023-07-01 KELLY EDWARD J III director A - A-Award Phantom Stock 1045.3 0
2023-07-01 KELLY EDWARD J III director A - A-Award Phantom Stock 261.32 0
2023-07-01 HEINRICH DANIEL J director A - A-Award Phantom Stock 1045.3 0
2023-07-01 HEINRICH DANIEL J director A - A-Award Phantom Stock 139.37 0
2023-07-01 GRISE CHERYL W director A - A-Award Phantom Stock 1045.3 0
2023-07-01 GRISE CHERYL W director A - A-Award Phantom Stock 322.3 0
2023-06-23 Hulett Jennifer Chief Human Resources Officer D - S-Sale Common Stock 1484 143.61
2023-05-01 Kindy Michael J officer - 0 0
2023-03-31 Aflatooni Robert Chief Information Officer A - A-Award Common Stock 3552 0
2023-03-31 Aflatooni Robert Chief Information Officer A - A-Award Stock Option (right to buy) 5730 143.55
2023-03-31 Creedon Michael C Jr Chief Operating Officer A - A-Award Common Stock 5433 0
2023-03-31 Creedon Michael C Jr Chief Operating Officer A - A-Award Stock Option (right to buy) 8764 143.55
2023-03-31 McNeely Richard L CMO - Dollar Tree A - A-Award Common Stock 4597 0
2023-03-31 McNeely Richard L CMO - Dollar Tree D - F-InKind Common Stock 14509 143.55
2023-03-31 McNeely Richard L CMO - Dollar Tree A - A-Award Stock Option (right to buy) 7416 143.55
2023-03-31 Gatta Lawrence J. Jr. Chief Merchandising Officer FD A - A-Award Common Stock 4597 0
2023-03-31 Gatta Lawrence J. Jr. Chief Merchandising Officer FD A - A-Award Stock Option (right to buy) 7416 143.55
2023-03-31 Hulett Jennifer Chief Human Resources Officer A - A-Award Common Stock 2507 0
2023-03-31 Hulett Jennifer Chief Human Resources Officer D - F-InKind Common Stock 436 143.55
2023-03-31 Hulett Jennifer Chief Human Resources Officer A - A-Award Stock Option (right to buy) 4045 143.55
2023-03-31 Davis Jeffrey A. Chief Financial Officer A - A-Award Common Stock 4702 0
2023-03-31 Davis Jeffrey A. Chief Financial Officer A - A-Award Stock Option (right to buy) 7584 143.55
2023-04-01 Park Winifred director A - A-Award Phantom Stock 261.23 0
2023-04-01 DICKSON THOMAS W director A - A-Award Phantom Stock 261.23 0
2023-04-01 Stahl Stephanie director A - A-Award Phantom Stock 313.48 0
2023-03-31 NAYLOR JEFFREY G director A - C-Conversion Common Stock 3414 0
2023-04-01 NAYLOR JEFFREY G director A - A-Award Phantom Stock 165.45 0
2023-03-31 NAYLOR JEFFREY G director D - C-Conversion Phantom Stock 3414 0
2023-04-01 KELLY EDWARD J III director A - A-Award Phantom Stock 261.23 0
2023-04-01 HEINRICH DANIEL J director A - A-Award Phantom Stock 139.32 0
2023-04-01 GRISE CHERYL W director A - A-Award Phantom Stock 322.19 0
2023-03-27 Davis Jeffrey A. Chief Financial Officer A - P-Purchase Common Stock 1790 139.0596
2023-03-16 McNeely Richard L CMO - Dollar Tree D - F-InKind Common Stock 1826 139.01
2023-03-09 DREILING RICHARD W Chief Executive Officer A - P-Purchase Common Stock 7100 142
2023-03-07 McNeely Richard L CMO - Dollar Tree A - A-Award Common Stock 11652 0
2023-03-07 McNeely Richard L CMO - Dollar Tree A - A-Award Common Stock 7817 0
2023-03-07 Gatta Lawrence J. Jr. Chief Merchandising Officer FD A - A-Award Common Stock 7090 0
2023-03-07 Hulett Jennifer Chief Human Resources Officer A - A-Award Common Stock 4343 0
2023-02-25 Hulett Jennifer Chief Human Resources Officer A - M-Exempt Common Stock 710 0
2023-02-25 Hulett Jennifer Chief Human Resources Officer D - F-InKind Common Stock 237 144
2023-01-01 HEINRICH DANIEL J director A - A-Award Phantom Stock 141.4 141.44
2023-01-01 NAYLOR JEFFREY G director A - A-Award Phantom Stock 167.92 141.44
2023-01-01 Stahl Stephanie director A - A-Award Phantom Stock 318.16 141.44
2023-01-01 GRISE CHERYL W director A - A-Award Phantom Stock 326.99 141.44
2023-01-01 KELLY EDWARD J III director A - A-Award Phantom Stock 265.13 141.44
2023-01-01 Park Winifred director A - A-Award Phantom Stock 265.13 141.44
2023-01-01 DICKSON THOMAS W director A - A-Award Phantom Stock 265.13 141.44
2022-12-30 Dhillon Janet Chief Legal Officer A - A-Award Common Stock 1767 141.44
2022-12-09 Mantle Ridge LP Director by deputization A - X-InTheMoney Cash-settled forward contracts 388000 55.88
2022-12-09 Mantle Ridge LP director A - X-InTheMoney Cash-settled forward contracts 388000 0
2022-12-09 Mantle Ridge LP director A - X-InTheMoney Cash-settled forward contracts 310000 0
2022-12-09 Mantle Ridge LP Director by deputization A - X-InTheMoney Cash-settled forward contracts 310000 55.61
2022-12-09 Mantle Ridge LP Director by deputization A - X-InTheMoney Cash-settled forward contracts 290000 55.29
2022-12-09 Mantle Ridge LP director A - X-InTheMoney Cash-settled forward contracts 290000 0
2022-12-09 Mantle Ridge LP director A - X-InTheMoney Cash-settled forward contracts 240105 0
2022-12-09 Mantle Ridge LP Director by deputization A - X-InTheMoney Cash-settled forward contracts 240105 56.06
2022-12-09 Mantle Ridge LP director D - J-Other Cash-settled forward contracts 150664 143.91
2022-12-09 Mantle Ridge LP Director by deputization D - J-Other Cash-settled forward contracts 150664 55.88
2022-12-09 Mantle Ridge LP director D - J-Other Cash-settled forward contracts 119801 143.91
2022-12-09 Mantle Ridge LP Director by deputization D - J-Other Cash-settled forward contracts 119801 55.61
2022-12-09 Mantle Ridge LP Director by deputization D - J-Other Cash-settled forward contracts 111414 55.29
2022-12-09 Mantle Ridge LP director D - J-Other Cash-settled forward contracts 111414 143.91
2022-12-09 Mantle Ridge LP director D - J-Other Cash-settled forward contracts 93534 143.91
2022-12-09 Mantle Ridge LP Director by deputization D - J-Other Cash-settled forward contracts 93534 56.06
2022-12-09 Mantle Ridge LP director A - X-InTheMoney Cash-settled forward contracts 128986 0
2022-12-09 Mantle Ridge LP Director by deputization A - X-InTheMoney Cash-settled forward contracts 128986 56.09
2022-12-09 Mantle Ridge LP director A - X-InTheMoney Cash-settled forward contracts 114749 0
2022-12-09 Mantle Ridge LP Director by deputization A - X-InTheMoney Cash-settled forward contracts 114749 55.8
2022-12-09 Mantle Ridge LP Director by deputization D - J-Other Cash-settled forward contracts 50275 56.09
2022-12-09 Mantle Ridge LP director D - J-Other Cash-settled forward contracts 50275 143.91
2022-12-09 Mantle Ridge LP director D - J-Other Cash-settled forward contracts 44490 143.91
2022-12-09 Mantle Ridge LP Director by deputization D - J-Other Cash-settled forward contracts 44490 55.8
2022-12-09 Mantle Ridge LP director A - X-InTheMoney Cash-settled forward contracts 35171 0
2022-12-09 Mantle Ridge LP Director by deputization A - X-InTheMoney Cash-settled forward contracts 35171 55.94
2022-12-09 Mantle Ridge LP director D - J-Other Cash-settled forward contracts 13672 143.91
2022-12-09 Mantle Ridge LP Director by deputization D - J-Other Cash-settled forward contracts 13672 55.94
2022-12-09 Mantle Ridge LP director D - X-InTheMoney Call options on cash-settled forwards (right to buy) 128986 0
2022-12-09 Mantle Ridge LP Director by deputization D - X-InTheMoney Call options on cash-settled forwards (right to buy) 128986 56.09
2022-12-09 Mantle Ridge LP Director by deputization D - X-InTheMoney Call options on cash-settled forwards (right to buy) 310000 55.61
2022-12-09 Mantle Ridge LP Director by deputization D - X-InTheMoney Call options on cash-settled forwards (right to buy) 240105 56.06
2022-12-09 Mantle Ridge LP Director by deputization D - X-InTheMoney Call options on cash-settled forwards (right to buy) 35171 55.94
2022-12-09 Mantle Ridge LP Director by deputization D - X-InTheMoney Call options on cash-settled forwards (right to buy) 114749 55.8
2022-12-09 Mantle Ridge LP Director by deputization D - X-InTheMoney Call options on cash-settled forwards (right to buy) 388000 55.88
2022-12-09 Mantle Ridge LP Director by deputization D - X-InTheMoney Call options on cash-settled forwards (right to buy) 290000 55.29
2022-11-25 Davis Jeffrey A. Chief Financial Officer A - A-Award Common Stock 13216 151.33
2022-11-25 Creedon Michael C Jr Chief Operating Officer A - A-Award Common Stock 7929 151.33
2022-11-21 Dhillon Janet None None - None None None
2022-11-21 Dhillon Janet officer - 0 0
2022-10-03 Davis Jeffrey A. officer - 0 0
2022-10-01 Stahl Stephanie director A - A-Award Phantom Stock 174.5 136.1
2022-10-01 NAYLOR JEFFREY G director A - A-Award Phantom Stock 174.5 136.1
2022-10-01 KELLY EDWARD J III director A - A-Award Phantom Stock 367.38 136.1
2022-10-01 HEINRICH DANIEL J director A - A-Award Phantom Stock 165.32 136.1
2022-10-01 GRISE CHERYL W director A - A-Award Phantom Stock 339.82 136.1
2022-10-01 DICKSON THOMAS W director A - A-Award Phantom Stock 275.53 136.1
2022-08-28 Witynski Michael A. President and CEO A - M-Exempt Common Stock 10292 0
2022-08-28 Witynski Michael A. President and CEO D - F-InKind Common Stock 4642 138.7
2022-08-26 Aflatooni Robert Chief Information Officer A - A-Award Common Stock 5407 0
2022-07-18 Aflatooni Robert officer - 0 0
2022-07-01 KELLY EDWARD J III director A - A-Award Phantom Stock 959.88 0
2022-07-01 KELLY EDWARD J III director A - A-Award Phantom Stock 959.88 0
2022-07-01 KELLY EDWARD J III director A - A-Award Phantom Stock 319.96 0
2022-07-01 KELLY EDWARD J III director A - A-Award Phantom Stock 319.96 0
2022-07-01 Park Winifred director A - A-Award Common Stock 959 156.27
2022-07-01 Laschinger Mary A A - A-Award Phantom Stock 959.88 156.27
2022-07-01 Laschinger Mary A director A - A-Award Phantom Stock 959.88 0
2022-07-01 DICKSON THOMAS W A - A-Award Phantom Stock 959.88 156.27
2022-07-01 DICKSON THOMAS W director A - A-Award Phantom Stock 959.88 0
2022-07-01 DICKSON THOMAS W director A - A-Award Phantom Stock 239.97 0
2022-07-01 HEINRICH DANIEL J A - A-Award Phantom Stock 959.88 156.27
2022-07-01 GRISE CHERYL W A - A-Award Phantom Stock 959.88 156.27
2022-07-01 KELLY EDWARD J III director A - A-Award Phantom Stock 989.55 0
2022-07-01 KELLY EDWARD J III A - A-Award Phantom Stock 319.96 156.27
2022-07-01 NAYLOR JEFFREY G A - A-Award Phantom Stock 959.88 156.27
2022-07-01 NAYLOR JEFFREY G director A - A-Award Phantom Stock 959.88 0
2022-07-01 NAYLOR JEFFREY G director A - A-Award Phantom Stock 151.98 0
2022-07-01 Stahl Stephanie A - A-Award Phantom Stock 959.88 156.27
2022-07-01 Stahl Stephanie director A - A-Award Phantom Stock 959.88 0
2022-07-01 Stahl Stephanie director A - A-Award Phantom Stock 151.98 0
2022-07-01 Park Winifred A - A-Award Common Stock 959.88 156.27
2022-07-01 SCOTT BERTRAM L A - A-Award Phantom Stock 959.88 156.27
2022-06-03 O'Boyle Thomas Jr Chief Operating Officer A - M-Exempt Common Stock 281 0
2022-06-03 O'Boyle Thomas Jr Chief Operating Officer D - F-InKind Common Stock 127 159.88
2022-06-03 O'Boyle Thomas Jr Chief Operating Officer D - M-Exempt Restricted Stock Unit 281 0
2022-05-09 Flanigan John W Chief Supply Chain Officer D - Common Stock 0 0
2022-04-18 SCOTT BERTRAM L A - A-Award Phantom Stock 253.22 0
2022-04-18 Laschinger Mary A A - A-Award Phantom Stock 253.22 0
2022-04-18 HEINRICH DANIEL J A - A-Award Phantom Stock 253.22 0
2022-04-18 GRISE CHERYL W A - A-Award Phantom Stock 312.31 0
2022-04-18 KELLY EDWARD J III director A - A-Award Phantom Stock 290.65 0
2022-04-18 KELLY EDWARD J III A - A-Award Phantom Stock 253.22 0
2022-04-07 Jacobs David A. Chief Strategy Officer D - S-Sale Common Stock 542 157.941
2022-04-07 Jacobs David A. Chief Strategy Officer D - S-Sale Common Stock 1346 162.7954
2022-04-01 Stahl Stephanie A - A-Award Phantom Stock 148.97 0
2022-04-01 NAYLOR JEFFREY G A - A-Award Phantom Stock 148.97 0
2022-04-01 DICKSON THOMAS W A - A-Award Phantom Stock 235.21 0
2022-04-01 Lech Michael Chief Logistics Officer A - M-Exempt Common Stock 1600 0
2022-04-01 Lech Michael Chief Logistics Officer D - F-InKind Common Stock 482 159.43
2022-04-01 O'Boyle Thomas Jr Chief Operating Officer A - M-Exempt Common Stock 8740 0
2022-04-01 O'Boyle Thomas Jr Chief Operating Officer D - F-InKind Common Stock 3942 159.43
2022-04-01 O'Boyle Thomas Jr Chief Operating Officer A - A-Award Common Stock 1235 0
2022-04-01 O'Boyle Thomas Jr Chief Operating Officer D - F-InKind Common Stock 557 159.43
2022-04-01 O'Boyle Thomas Jr Chief Operating Officer D - M-Exempt Restricted Stock Unit 8740 0
2022-04-01 Click Betty J. Former CHRO A - M-Exempt Common Stock 5141 0
2022-04-01 Click Betty J. Former CHRO D - F-InKind Common Stock 2319 159.43
2022-04-01 Click Betty J. Former CHRO A - M-Exempt Common Stock 1772 0
2022-04-01 Click Betty J. Former CHRO D - F-InKind Common Stock 646 159.43
2022-04-01 Click Betty J. Former CHRO A - A-Award Common Stock 1235 0
2022-04-01 Click Betty J. Former CHRO D - F-InKind Common Stock 557 159.43
2022-04-01 Click Betty J. Former CHRO D - M-Exempt Restricted Stock Unit 5141 0
2022-04-01 Click Betty J. Former CHRO D - M-Exempt Restricted Stock Unit 1772 0
2022-04-01 Old William A. JR Chief Legal Officer A - M-Exempt Common Stock 8486 0
2022-04-01 Old William A. JR Chief Legal Officer D - F-InKind Common Stock 3828 159.43
2022-04-01 Old William A. JR Chief Legal Officer A - M-Exempt Common Stock 2590 0
2022-04-01 Old William A. JR Chief Legal Officer D - F-InKind Common Stock 1169 159.43
2022-04-01 Old William A. JR Chief Legal Officer A - A-Award Common Stock 2471 0
2022-04-01 Old William A. JR Chief Legal Officer D - F-InKind Common Stock 1115 159.43
2022-04-01 Old William A. JR Chief Legal Officer D - M-Exempt Restricted Stock Unit 8486 0
2022-04-01 Old William A. JR Chief Legal Officer D - M-Exempt Restricted Stock Unit 2590 0
2022-04-01 McNeely Richard L Chief Merchandising Officer D - F-InKind Common Stock 3942 159.43
2022-04-01 McNeely Richard L Chief Merchandising Officer A - A-Award Common Stock 1412 0
2022-04-01 McNeely Richard L Chief Merchandising Officer D - M-Exempt Restricted Stock Unit 2535 0
2022-04-01 WAMPLER KEVIN S Chief Financial Officer A - M-Exempt Common Stock 12085 0
2022-04-01 WAMPLER KEVIN S Chief Financial Officer D - F-InKind Common Stock 5451 159.43
2022-04-01 WAMPLER KEVIN S Chief Financial Officer D - G-Gift Common Stock 197 0
2022-04-01 WAMPLER KEVIN S Chief Financial Officer A - A-Award Common Stock 3354 0
2022-04-01 Jacobs David A. Chief Strategy Officer A - M-Exempt Common Stock 7972 0
2022-04-01 Jacobs David A. Chief Strategy Officer D - F-InKind Common Stock 3596 159.43
2022-04-01 Jacobs David A. Chief Strategy Officer A - M-Exempt Common Stock 2454 0
2022-04-01 Jacobs David A. Chief Strategy Officer D - F-InKind Common Stock 1107 159.43
2022-04-01 Jacobs David A. Chief Strategy Officer A - A-Award Common Stock 2294 0
2022-04-01 Jacobs David A. Chief Strategy Officer D - F-InKind Common Stock 1035 159.43
2022-04-01 Jacobs David A. Chief Strategy Officer D - M-Exempt Restricted Stock Unit 7972 0
2022-04-01 Jacobs David A. Chief Strategy Officer D - M-Exempt Restricted Stock Unit 2454 0
2022-04-01 Witynski Michael A. President and CEO A - M-Exempt Common Stock 17480 0
2022-04-01 Witynski Michael A. President and CEO D - F-InKind Common Stock 7884 159.43
2022-04-01 Witynski Michael A. President and CEO A - M-Exempt Common Stock 4474 0
2022-04-01 Witynski Michael A. President and CEO D - F-InKind Common Stock 2018 159.43
2022-04-01 Witynski Michael A. President and CEO A - A-Award Common Stock 3177 0
2022-04-01 Witynski Michael A. President and CEO D - F-InKind Common Stock 1433 159.43
2022-04-01 Witynski Michael A. President and CEO D - M-Exempt Restricted Stock Unit 17480 0
2022-04-01 Witynski Michael A. President and CEO D - M-Exempt Restricted Stock Unit 4474 0
2022-03-28 HEINRICH DANIEL J A - P-Purchase Common Stock 425 156.095
2022-03-16 KELLY EDWARD J III director D - Common Stock 0 0
2022-03-16 Mantle Ridge LP I - Common Stock 0 0
2021-11-08 Mantle Ridge LP I - Physically settled call options (right to buy) 252460 75
2021-11-12 Mantle Ridge LP I - Physically settled call options (right to buy) 116250 70
2021-08-12 Mantle Ridge LP I - Call options on cash-settled forwards (right to buy) 114749 55.8
2021-08-13 Mantle Ridge LP I - Call options on cash-settled forwards (right to buy) 35171 55.94
2021-08-16 Mantle Ridge LP I - Call options on cash-settled forwards (right to buy) 240105 56.06
2021-08-17 Mantle Ridge LP I - Call options on cash-settled forwards (right to buy) 290000 55.29
2021-08-18 Mantle Ridge LP I - Call options on cash-settled forwards (right to buy) 388000 55.88
2021-10-29 Mantle Ridge LP I - Call options on cash-settled forwards (right to buy) 1753655 55
2021-08-19 Mantle Ridge LP I - Call options on cash-settled forwards (right to buy) 310000 55.61
2021-08-20 Mantle Ridge LP I - Call options on cash-settled forwards (right to buy) 128986 56.09
2021-11-05 Mantle Ridge LP I - Call options on cash-settled forwards (right to buy) 301800 60
2021-11-09 Mantle Ridge LP I - Call options on cash-settled forwards (right to buy) 2160401 70
2022-03-16 SCOTT BERTRAM L director D - Common Stock 0 0
2022-03-16 Laschinger Mary A director D - Common Stock 0 0
2022-03-16 HEINRICH DANIEL J director D - Common Stock 0 0
2022-03-19 DREILING RICHARD W A - A-Award Stock Option (right to buy) 2252587 0
2022-03-16 DREILING RICHARD W director D - Common Stock 0 0
2022-03-16 Witynski Michael A. President and CEO A - M-Exempt Common Stock 14732 0
2022-03-16 Witynski Michael A. President and CEO A - A-Award Restricted Stock Unit 44197 0
2022-03-16 Witynski Michael A. President and CEO A - M-Exempt Common Stock 4993 0
2022-03-16 Witynski Michael A. President and CEO D - F-InKind Common Stock 2252 152.08
2022-03-16 Witynski Michael A. President and CEO D - F-InKind Common Stock 5666 152.08
2022-03-16 Witynski Michael A. President and CEO D - M-Exempt Restricted Stock Unit 14732 0
2022-03-16 Witynski Michael A. President and CEO D - M-Exempt Restricted Stock Unit 4993 0
2022-03-16 WAMPLER KEVIN S Chief Financial Officer D - F-InKind Common Stock 709 152.08
2022-03-16 WAMPLER KEVIN S Chief Financial Officer A - A-Award Restricted Stock Unit 14325 0
2022-03-16 WAMPLER KEVIN S Chief Financial Officer D - M-Exempt Restricted Stock Unit 2169 0
2022-03-16 Paisley James A. Chief Information Officer A - A-Award Restricted Stock Unit 3961 0
2022-03-16 Paisley James A. Chief Information Officer D - M-Exempt Restricted Stock Unit 1320 0
2022-03-16 Paisley James A. Chief Information Officer D - F-InKind Common Stock 398 152.08
2022-03-16 Old William A. JR Chief Legal Officer A - M-Exempt Common Stock 1476 0
2022-03-16 Old William A. JR Chief Legal Officer D - F-InKind Common Stock 445 152.08
2022-03-16 Old William A. JR Chief Legal Officer A - M-Exempt Common Stock 3352 0
2022-03-16 Old William A. JR Chief Legal Officer D - F-InKind Common Stock 1010 152.08
2022-03-16 Old William A. JR Chief Legal Officer A - A-Award Restricted Stock Unit 10058 0
2022-03-16 Old William A. JR Chief Legal Officer D - M-Exempt Restricted Stock Unit 3352 0
2022-03-16 Old William A. JR Chief Legal Officer D - M-Exempt Restricted Stock Unit 1476 0
2022-03-16 O'Boyle Thomas Jr Chief Operating Officer A - M-Exempt Common Stock 1958 0
2022-03-16 O'Boyle Thomas Jr Chief Operating Officer A - A-Award Restricted Stock Unit 10362 0
2022-03-16 O'Boyle Thomas Jr Chief Operating Officer D - F-InKind Common Stock 590 152.08
2022-03-16 O'Boyle Thomas Jr Chief Operating Officer A - M-Exempt Common Stock 3454 0
2022-03-16 O'Boyle Thomas Jr Chief Operating Officer D - F-InKind Common Stock 1038 152.08
2022-03-16 O'Boyle Thomas Jr Chief Operating Officer D - M-Exempt Restricted Stock Unit 3454 0
2022-03-16 O'Boyle Thomas Jr Chief Operating Officer D - M-Exempt Restricted Stock Unit 1958 0
2022-03-16 McNeely Richard L Chief Merchandising Officer A - A-Award Restricted Stock Unit 10972 0
2022-03-16 McNeely Richard L Chief Merchandising Officer A - M-Exempt Common Stock 2410 0
2022-03-16 McNeely Richard L Chief Merchandising Officer D - F-InKind Common Stock 1100 152.08
2022-03-16 Lech Michael Chief Logistics Officer A - A-Award Restricted Stock Unit 4419 0
2022-03-16 Lech Michael Chief Logistics Officer D - F-InKind Common Stock 239 152.08
2022-03-16 Lech Michael Chief Logistics Officer D - M-Exempt Restricted Stock Unit 792 0
2022-03-16 Alasdair James EVP Merch and Supply Chain A - A-Award Restricted Stock Unit 14020 0
2022-03-16 Alasdair James EVP Merch and Supply Chain D - M-Exempt Restricted Stock Unit 4673 0
2022-03-16 Alasdair James EVP Merch and Supply Chain A - M-Exempt Common Stock 4673 0
2022-03-16 Alasdair James EVP Merch and Supply Chain D - F-InKind Common Stock 1406 152.08
2022-03-16 Jacobs David A. Chief Strategy Officer A - M-Exempt Common Stock 1391 0
2022-03-16 Jacobs David A. Chief Strategy Officer D - F-InKind Common Stock 419 152.08
2022-03-16 Jacobs David A. Chief Strategy Officer A - M-Exempt Common Stock 3149 0
2022-03-16 Jacobs David A. Chief Strategy Officer D - F-InKind Common Stock 951 152.08
2022-03-16 Jacobs David A. Chief Strategy Officer A - A-Award Restricted Stock Unit 9448 0
2022-03-16 Jacobs David A. Chief Strategy Officer D - M-Exempt Restricted Stock Unit 3149 0
2022-03-16 Jacobs David A. Chief Strategy Officer D - M-Exempt Restricted Stock Unit 1391 0
2022-03-16 Click Betty J. Former CHRO A - M-Exempt Common Stock 1159 0
2022-03-16 Click Betty J. Former CHRO D - F-InKind Common Stock 349 152.08
2022-03-16 Click Betty J. Former CHRO A - M-Exempt Common Stock 2031 0
2022-03-16 Click Betty J. Former CHRO D - F-InKind Common Stock 621 152.08
2022-03-16 Click Betty J. Former CHRO A - A-Award Restricted Stock Unit 6095 0
2022-03-16 Click Betty J. Former CHRO D - M-Exempt Restricted Stock Unit 2031 0
2022-03-16 Click Betty J. Former CHRO D - M-Exempt Restricted Stock Unit 1159 0
2022-03-01 BRIDGEFORD GREGORY M director A - A-Award Phantom Stock 357.88 0
2022-03-01 NAYLOR JEFFREY G director A - A-Award Phantom Stock 178.94 0
2022-02-25 Hulett Jennifer Chief Human Resources Officer A - A-Award Restricted Stock Unit 2132 0
2022-02-25 Hulett Jennifer Chief Human Resources Officer A - A-Award Restricted Stock Unit 2132 0
2022-01-29 Paisley James A. Chief Information Officer D - M-Exempt Restricted Stock Unit 983 0
2022-01-29 Paisley James A. Chief Information Officer A - M-Exempt Common Stock 983 0
2022-01-29 Paisley James A. Chief Information Officer D - F-InKind Common Stock 337 128.49
2022-01-17 Hulett Jennifer Chief Human Resources Officer D - Common Stock 0 0
2022-01-06 Jacobs David A. Chief Strategy Officer D - S-Sale Common Stock 3395 143.0009
2022-01-01 WHEELER CARRIE director A - A-Award Stock Option (right to buy) 1078 140.52
2022-01-01 Stahl Stephanie director A - A-Award Phantom Stock 169.02 0
2022-01-01 NAYLOR JEFFREY G director A - A-Award Phantom Stock 195.7 0
2022-01-01 Lewis Lemuel E director A - A-Award Phantom Stock 355.82 0
2022-01-01 DICKSON THOMAS W director A - A-Award Phantom Stock 346.93 0
2022-01-01 BRIDGEFORD GREGORY M director A - A-Award Phantom Stock 453.67 0
2021-11-15 Old William A. JR Chief Legal Officer D - S-Sale Common Stock 8960 123.39
2021-11-15 Old William A. JR Chief Legal Officer D - S-Sale Common Stock 8960 123.39
2021-11-15 Old William A. JR Chief Legal Officer D - S-Sale Common Stock 7207 128
2021-11-15 Old William A. JR Chief Legal Officer D - S-Sale Common Stock 7207 128
2021-11-15 Old William A. JR Chief Legal Officer D - S-Sale Common Stock 100 128.015
2021-11-15 Old William A. JR Chief Legal Officer D - S-Sale Common Stock 100 128.015
2021-10-01 WHEELER CARRIE director A - A-Award Phantom Stock 510.31 0
2021-10-01 Stahl Stephanie director A - A-Award Phantom Stock 242.4 0
2021-10-01 NAYLOR JEFFREY G director A - A-Award Phantom Stock 280.67 0
2021-10-01 Lewis Lemuel E director A - A-Award Phantom Stock 510.31 0
2021-10-01 DICKSON THOMAS W director A - A-Award Phantom Stock 497.55 0
2021-10-01 BRIDGEFORD GREGORY M director A - A-Award Phantom Stock 650.64 0
2021-10-01 BRIDGEFORD GREGORY M director A - A-Award Phantom Stock 650.64 0
2021-10-01 BARRON ARNOLD S director A - A-Award Phantom Stock 298.53 0
2021-08-28 Witynski Michael A. President and CEO A - M-Exempt Common Stock 10292 0
2021-08-28 Witynski Michael A. President and CEO D - F-InKind Common Stock 4642 90.89
2021-08-28 Witynski Michael A. President and CEO D - M-Exempt Restricted Stock Unit 10292 0
2021-07-02 Lech Michael Chief Logistics Officer A - M-Exempt Common Stock 801 0
2021-07-02 Lech Michael Chief Logistics Officer D - F-InKind Common Stock 242 99.45
2021-07-02 Lech Michael Chief Logistics Officer D - M-Exempt Restricted Stock Unit 801 0
2021-07-01 WHIDDON THOMAS E director A - A-Award Phantom Stock 750.68 0
2021-07-01 WHEELER CARRIE director A - A-Award Common Stock 750 0
2021-07-01 WHEELER CARRIE director A - A-Award Common Stock 750 0
2021-07-01 WHEELER CARRIE director A - A-Award Phantom Stock 500.45 0
2021-07-01 WHEELER CARRIE director A - A-Award Phantom Stock 500.45 0
2021-07-01 Stahl Stephanie director A - A-Award Phantom Stock 750.68 0
2021-07-01 Stahl Stephanie director A - A-Award Phantom Stock 237.71 0
2021-07-01 Park Winifred director A - A-Award Common Stock 750 0
2021-07-01 NAYLOR JEFFREY G director A - A-Award Phantom Stock 750.68 0
2021-07-01 NAYLOR JEFFREY G director A - A-Award Phantom Stock 275.25 0
2021-07-01 Lewis Lemuel E director A - A-Award Phantom Stock 750.68 0
2021-07-01 Lewis Lemuel E director A - A-Award Phantom Stock 500.45 0
2021-07-01 DICKSON THOMAS W director A - A-Award Phantom Stock 750.68 0
2021-07-01 DICKSON THOMAS W director A - A-Award Phantom Stock 487.94 0
2021-07-01 BRIDGEFORD GREGORY M director A - A-Award Phantom Stock 750.68 0
2021-07-01 BRIDGEFORD GREGORY M director A - A-Award Phantom Stock 638.07 0
2021-07-01 BARRON ARNOLD S director A - A-Award Phantom Stock 750.68 0
2021-07-01 BARRON ARNOLD S director A - A-Award Phantom Stock 292.76 0
2021-06-21 McNeely Richard L Chief Merchandising Officer D - S-Sale Common Stock 7635 101.1634
2021-06-09 NAYLOR JEFFREY G director A - P-Purchase Common Stock 2500 99.16
2021-06-09 NAYLOR JEFFREY G director A - P-Purchase Common Stock 2500 99.16
2021-06-03 O'Boyle Thomas Jr Chief Operating Officer A - M-Exempt Common Stock 281 0
2021-06-03 O'Boyle Thomas Jr Chief Operating Officer D - F-InKind Common Stock 127 100.56
2021-06-03 O'Boyle Thomas Jr Chief Operating Officer D - M-Exempt Restricted Stock Unit 281 0
2021-06-02 Lewis Lemuel E director A - P-Purchase Common Stock 258 98.45
2021-06-02 Lewis Lemuel E director A - P-Purchase Common Stock 200 98.44
2021-06-02 Lewis Lemuel E director A - P-Purchase Common Stock 354 98.41
2021-06-02 Lewis Lemuel E director A - P-Purchase Common Stock 188 98.38
2021-06-01 BRIDGEFORD GREGORY M director A - P-Purchase Common Stock 100 99.08
2021-06-01 BRIDGEFORD GREGORY M director A - P-Purchase Common Stock 100 99.075
2021-06-01 BRIDGEFORD GREGORY M director A - P-Purchase Common Stock 200 99.05
2021-06-01 BRIDGEFORD GREGORY M director A - P-Purchase Common Stock 100 99.045
2021-06-01 BRIDGEFORD GREGORY M director A - P-Purchase Common Stock 900 99.04
2021-06-01 BRIDGEFORD GREGORY M director A - P-Purchase Common Stock 200 99.035
2021-06-01 BRIDGEFORD GREGORY M director A - P-Purchase Common Stock 800 99.03
2021-06-01 BRIDGEFORD GREGORY M director A - P-Purchase Common Stock 700 99.02
2021-06-01 BRIDGEFORD GREGORY M director A - P-Purchase Common Stock 100 99.015
2021-06-01 BRIDGEFORD GREGORY M director A - P-Purchase Common Stock 600 99.01
2021-06-01 BRIDGEFORD GREGORY M director A - P-Purchase Common Stock 100 99.005
2021-06-01 BRIDGEFORD GREGORY M director A - P-Purchase Common Stock 300 99
2021-06-01 BRIDGEFORD GREGORY M director A - P-Purchase Common Stock 600 98.99
2021-06-01 BRIDGEFORD GREGORY M director A - P-Purchase Common Stock 100 98.98
2021-06-01 BRIDGEFORD GREGORY M director A - P-Purchase Common Stock 100 98.96
2021-06-01 BRIDGEFORD GREGORY M director A - P-Purchase Common Stock 100 98.955
2021-05-20 SAUNDERS THOMAS A director A - M-Exempt Common Stock 1541 93.39
2021-05-20 SAUNDERS THOMAS A director A - M-Exempt Common Stock 1530 94.05
2021-05-20 SAUNDERS THOMAS A director D - M-Exempt Stock Option (right to buy) 1530 94.05
2021-05-20 SAUNDERS THOMAS A director D - M-Exempt Stock Option (right to buy) 1541 93.39
2021-05-19 SAUNDERS THOMAS A director A - M-Exempt Common Stock 1566 91.87
2021-05-19 SAUNDERS THOMAS A director A - M-Exempt Common Stock 1973 72.94
2021-05-19 SAUNDERS THOMAS A director D - M-Exempt Stock Option (right to buy) 1973 72.94
2021-05-19 SAUNDERS THOMAS A director D - M-Exempt Stock Option (right to buy) 1566 91.87
2021-04-26 SASSER BOB Executive Chairman D - S-Sale Common Stock 3718 114.17
2021-04-26 SASSER BOB Executive Chairman D - S-Sale Common Stock 3764 114.191
2021-04-26 SASSER BOB Executive Chairman D - S-Sale Common Stock 3074 114.94
2021-04-26 SASSER BOB Executive Chairman D - S-Sale Common Stock 3028 114.9336
2021-04-26 Jacobs David A. Chief Strategy Officer D - S-Sale Common Stock 3869 115.3
2021-04-26 WAMPLER KEVIN S Chief Financial Officer D - S-Sale Common Stock 5381 114.1
2021-04-26 WAMPLER KEVIN S Chief Financial Officer D - S-Sale Common Stock 6684 114.98
2021-04-27 WAMPLER KEVIN S Chief Financial Officer D - S-Sale Common Stock 8070 115.0765
2021-04-01 Stahl Stephanie director A - A-Award Phantom Stock 204.87 0
2021-04-01 Stahl Stephanie director A - A-Award Phantom Stock 204.87 0
2021-04-01 NAYLOR JEFFREY G director A - A-Award Phantom Stock 239.69 0
2021-04-01 BRIDGEFORD GREGORY M director A - A-Award Phantom Stock 549.9 0
2021-04-01 ZEITHAML CARL P director A - A-Award Phantom Stock 196.24 0
2021-04-01 Lewis Lemuel E director A - A-Award Phantom Stock 431.29 0
2021-04-01 DICKSON THOMAS W director A - A-Award Phantom Stock 420.51 0
2021-04-01 WHEELER CARRIE director A - A-Award Phantom Stock 431.29 0
2021-01-05 BARRON ARNOLD S director A - M-Exempt Common Stock 318.38 0
2021-01-05 BARRON ARNOLD S director A - M-Exempt Common Stock 803.08 0
2021-01-05 BARRON ARNOLD S director A - M-Exempt Common Stock 313.2 0
2021-01-05 BARRON ARNOLD S director A - M-Exempt Common Stock 401.01 0
2021-01-05 BARRON ARNOLD S director A - M-Exempt Common Stock 311 0
2021-01-05 BARRON ARNOLD S director A - M-Exempt Common Stock 258.28 0
2021-04-01 BARRON ARNOLD S director A - A-Award Phantom Stock 252.31 0
2021-01-05 BARRON ARNOLD S director D - M-Exempt Phantom Stock 318.38 0
2021-04-01 Old William A. JR Chief Legal Officer D - M-Exempt Restricted Stock Unit 8486 0
2021-04-01 Old William A. JR Chief Legal Officer A - M-Exempt Common Stock 8486 0
2021-04-01 Old William A. JR Chief Legal Officer D - F-InKind Common Stock 3828 115.93
2021-04-01 Old William A. JR Chief Legal Officer A - M-Exempt Common Stock 2590 0
2021-04-01 Old William A. JR Chief Legal Officer D - F-InKind Common Stock 1169 115.93
2021-04-01 Old William A. JR Chief Legal Officer D - M-Exempt Restricted Stock Unit 2590 0
2021-04-01 O'Boyle Thomas Jr Chief Operating Officer D - M-Exempt Restricted Stock Unit 8740 0
2021-04-01 O'Boyle Thomas Jr Chief Operating Officer A - M-Exempt Common Stock 8740 0
2021-04-01 O'Boyle Thomas Jr Chief Operating Officer D - F-InKind Common Stock 3883 115.93
2021-04-01 McNeely Richard L Chief Merchandising Officer D - M-Exempt Restricted Stock Unit 8740 0
2021-04-01 McNeely Richard L Chief Merchandising Officer A - M-Exempt Common Stock 8740 0
2021-04-01 McNeely Richard L Chief Merchandising Officer D - F-InKind Common Stock 3942 115.93
2021-04-01 McNeely Richard L Chief Merchandising Officer A - M-Exempt Common Stock 2535 0
2021-04-01 McNeely Richard L Chief Merchandising Officer D - F-InKind Common Stock 1144 115.93
2021-04-01 McNeely Richard L Chief Merchandising Officer D - M-Exempt Restricted Stock Unit 2535 0
2021-04-01 Lech Michael Chief Logistics Officer D - M-Exempt Restricted Stock Unit 1599 0
2021-04-01 Lech Michael Chief Logistics Officer A - M-Exempt Common Stock 1599 0
2021-04-01 Lech Michael Chief Logistics Officer D - F-InKind Common Stock 482 115.93
2021-04-01 Witynski Michael A. President and CEO D - M-Exempt Restricted Stock Unit 17480 0
2021-04-01 Witynski Michael A. President and CEO A - M-Exempt Common Stock 17480 0
2021-04-01 Witynski Michael A. President and CEO D - F-InKind Common Stock 7884 115.93
2021-04-01 Witynski Michael A. President and CEO A - M-Exempt Common Stock 4473 0
2021-04-01 Witynski Michael A. President and CEO D - F-InKind Common Stock 2018 115.93
2021-04-01 Witynski Michael A. President and CEO D - M-Exempt Restricted Stock Unit 4473 0
2021-04-01 WAMPLER KEVIN S Chief Financial Officer A - M-Exempt Common Stock 12085 0
2021-04-01 WAMPLER KEVIN S Chief Financial Officer D - F-InKind Common Stock 5451 115.93
2021-04-01 WAMPLER KEVIN S Chief Financial Officer A - M-Exempt Common Stock 3816 0
2021-04-01 WAMPLER KEVIN S Chief Financial Officer D - F-InKind Common Stock 1722 115.93
2021-04-01 WAMPLER KEVIN S Chief Financial Officer D - M-Exempt Restricted Stock Unit 12085 0
2021-04-01 WAMPLER KEVIN S Chief Financial Officer D - M-Exempt Restricted Stock Unit 3816 0
2021-04-01 SASSER BOB Executive Chairman A - M-Exempt Common Stock 37702 0
2021-04-01 SASSER BOB Executive Chairman D - F-InKind Common Stock 17004 115.93
2021-04-01 SASSER BOB Executive Chairman A - M-Exempt Common Stock 14994 0
2021-04-01 SASSER BOB Executive Chairman D - F-InKind Common Stock 6763 115.93
2021-04-01 SASSER BOB Executive Chairman D - M-Exempt Restricted Stock Unit 37702 0
2021-04-01 SASSER BOB Executive Chairman D - M-Exempt Restricted Stock Unit 14994 0
2021-04-01 Jacobs David A. Chief Strategy Officer A - M-Exempt Common Stock 7972 0
2021-04-01 Jacobs David A. Chief Strategy Officer D - M-Exempt Restricted Stock Unit 7972 0
2021-04-01 Jacobs David A. Chief Strategy Officer D - F-InKind Common Stock 3596 115.93
2021-04-01 Jacobs David A. Chief Strategy Officer A - M-Exempt Common Stock 2453 0
2021-04-01 Jacobs David A. Chief Strategy Officer D - F-InKind Common Stock 1107 115.93
2021-04-01 Jacobs David A. Chief Strategy Officer D - M-Exempt Restricted Stock Unit 2453 0
2021-04-01 Click Betty J. Chief Human Resources Officer A - M-Exempt Common Stock 5141 0
2021-04-01 Click Betty J. Chief Human Resources Officer D - F-InKind Common Stock 2319 115.93
2021-04-01 Click Betty J. Chief Human Resources Officer A - M-Exempt Common Stock 1772 0
2021-04-01 Click Betty J. Chief Human Resources Officer D - F-InKind Common Stock 554 115.93
2021-04-01 Click Betty J. Chief Human Resources Officer D - M-Exempt Restricted Stock Unit 5141 0
2021-04-01 Click Betty J. Chief Human Resources Officer D - M-Exempt Restricted Stock Unit 1772 0
2021-03-30 Old William A. JR Chief Legal Officer A - M-Exempt Common Stock 3160 0
2021-03-30 Old William A. JR Chief Legal Officer D - F-InKind Common Stock 1064 116.23
2021-03-30 Old William A. JR Chief Legal Officer D - M-Exempt Restricted Stock Unit 3160 0
2021-03-30 Click Betty J. Chief Human Resources Officer A - M-Exempt Common Stock 2107 0
2021-03-30 Click Betty J. Chief Human Resources Officer D - F-InKind Common Stock 635 116.23
2021-03-30 Click Betty J. Chief Human Resources Officer D - M-Exempt Restricted Stock Unit 2107 0
2021-03-30 McNeely Richard L Chief Merchandising Officer A - M-Exempt Common Stock 2634 0
2021-03-30 McNeely Richard L Chief Merchandising Officer D - F-InKind Common Stock 1188 116.23
2021-03-30 McNeely Richard L Chief Merchandising Officer D - M-Exempt Restricted Stock Unit 2634 0
2021-03-30 Jacobs David A. Chief Strategy Officer A - M-Exempt Common Stock 3160 0
2021-03-30 Jacobs David A. Chief Strategy Officer D - F-InKind Common Stock 1011 116.23
2021-03-30 Jacobs David A. Chief Strategy Officer D - M-Exempt Restricted Stock Unit 3160 0
2021-03-30 Witynski Michael A. President and CEO A - M-Exempt Common Stock 4214 0
2021-03-30 Witynski Michael A. President and CEO D - F-InKind Common Stock 1901 116.23
2021-03-30 Witynski Michael A. President and CEO D - M-Exempt Restricted Stock Unit 4214 0
2021-03-30 WAMPLER KEVIN S Chief Financial Officer A - M-Exempt Common Stock 4565 0
2021-03-30 WAMPLER KEVIN S Chief Financial Officer D - F-InKind Common Stock 2059 116.23
2021-03-30 WAMPLER KEVIN S Chief Financial Officer D - M-Exempt Restricted Stock Unit 4565 0
2021-03-30 SASSER BOB Executive Chairman A - M-Exempt Common Stock 24587 0
2021-03-30 SASSER BOB Executive Chairman D - F-InKind Common Stock 9799 116.23
2021-03-30 SASSER BOB Executive Chairman D - M-Exempt Restricted Stock Unit 24587 0
2021-02-03 SASSER BOB Executive Chairman D - Common Stock 0 0
2021-03-16 O'Boyle Thomas Jr Chief Operating Officer A - A-Award Restricted Stock Unit 3916 0
2021-03-16 Old William A. JR Chief Legal Officer A - A-Award Restricted Stock Unit 2952 0
2021-03-16 McNeely Richard L Chief Merchandising Officer A - A-Award Restricted Stock Unit 9170 0
2021-03-16 McNeely Richard L Chief Merchandising Officer A - A-Award Restricted Stock Unit 4820 0
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Transcripts
Operator:
Hello, and welcome to the Dollar Tree Q1 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.
It's now my pleasure to turn the call over to Bob LaFleur, Senior Vice President, Investor Relations. Please go ahead, sir.
Robert LaFleur:
Good morning, and thank you for joining us today to discuss Dollar Tree's First Quarter fiscal 2024 results. With me today are Dollar Tree's Chairman and CEO, Rick Dreiling; and CFO, Jeff Davis.
Before we begin, I would like to remind everyone that some of the remarks that we will make today about the company's expectations, plans and future prospects are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties, which could cause actual results to differ materially from those contemplated by our forward-looking statements. For information on the risks and uncertainties that could affect our actual results, please see the risk factors, Business and Management Discussion and Analysis of Financial Condition and Results of Operations sections in our annual report on Form 10-K filed on March 20, 2024, our most recent press release and Form 8-K and other filings with the SEC. We caution against reliance on any forward-looking statements made today, and we disclaim any obligation to update any forward-looking statements, except as required by law. Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided in today's earnings release available on the IR section of our website. These non-GAAP measures are not intended to be a substitute for GAAP results. Unless otherwise stated, we will refer to our financial results on a GAAP basis. Additionally, unless otherwise stated, all comparisons discussed today for the first quarter of fiscal 2024 are against the same period a year ago. Please note that a supplemental slide deck outlining selected operating metrics is available on the IR section of our website. Following our prepared remarks, Rick and Jeff will take your questions. Given the number of callers who would like to participate in today's session, we ask that you limit yourself to 1 question. I'd now like to turn the call over to Rick.
Richard Dreiling:
Thanks, Bob. Good morning, and thank you for joining us on our call today. I'd like to begin my remarks today by extending my heartfelt gratitude to members of our Dollar Tree community following the devastating tornado in Marietta, Oklahoma. While the tornado destroyed our Dollar Tree distribution center there, I'm especially thankful that no one was injured in our facility. I am also extremely proud of the resilience displayed by our team members in the aftermath of this tragic event.
Fortunately, our distribution network is flexible and while we expect to absorb incremental operating costs, we believe we will keep store level disruption to a minimum. The leadership team at Dollar Tree is also highly sensitive to the wider impact of this disaster on our associates, their families and the broader Marietta community. With this in mind, we set up a temporary site at a local hotel to help support our associates in their time of need. We brought in food and other essential supplies such as batteries, chargers, diapers and toiletries. Our associates have access to over $200,000 a in immediate response grants and mental health services. For everyone impacted by the recent situation in Marietta, I want to thank you for everything you've done during this difficult time. It's during these periods of adversity that the strength and character of our organization shines through. Whether it's dealing with natural disasters or important strategic decisions, our associates and the communities they serve are always top of mind. As I'm sure you saw in our announcement earlier today, we are initiating a formal review of strategic alternatives for the Family Dollar business. The decision to explore strategic alternatives includes evaluating how each separate banner might appeal differently to different sets of owners. It also includes evaluating whether accelerating Dollar Tree's growth and completing Family Dollars transformation might be best accomplished by separate dedicated leadership teams separating the 2 businesses could enhance the performance of each 1 individually and allow them both to reach their true valuation potential. Let me provide some additional background and context. We have been on a multiyear journey to transform this organization and fully unlock its intrinsic value. An important step in this process was our portfolio review and the decision to close 970 underperforming Family Dollar stores. Many of these stores had been underinvested in for years and the capital investment required to fix them could not deliver an acceptable rate of return. Moving forward with a streamlined portfolio should help accelerate Family Dollar's transformation and improve the long-term returns of the business. While we are working to transform Family Dollar, we continue to aggressively grow the Dollar Tree banner by expanding our multi-price offering accelerating our rate of new store openings and pursuing accretive transactions like our recent acquisition of up to 170 stores out of the $0.99 only bankruptcy. These stores are highly complementary to the Dollar Tree banner and are expected to produce sales, profits and returns that are well above our portfolio average. We are pleased to bring these locations under the Dollar Tree banner and look forward to their openings later this year. Today, each banner is at a different stage of its respective journey and each has its own set of unique needs. This is why we believe now is the right time to conduct a thorough review of strategic alternatives for Family Dollar so we can determine what is the proper operational and ownership structure to best support and enable its transformation. At the same time, that should allow us to fully unlock the value of the Dollar Tree banner. In the end, we want to ensure that both the Dollar Tree and Family Dollar banners have the right strategic, operational and capital structures necessary to meet the evolving needs of their customers and to maximize value creation in each business. As I said in my opening, our associates and the communities they serve are always top of mind for us. For 65 years, Family Dollar has played an incredibly important role in neighborhoods across America by helping families do more with less. This would not be possible without the dedication of our incredible Family Dollar associates. One of the priorities of this strategic review is to make sure that Family Dollar is properly positioned for long-term prosperity. All that said, we are still in the very early stages of this review. We have not made any pre judgments regarding the eventual outcome of this process especially given the wide range of potential outcomes. As I'm sure you can appreciate, there is a lot of work to be done, and we do not intend to provide any further updates unless and until the Board has approved a specific course of action or determined that further disclosures are appropriate or necessary. I thank you in advance for your understanding on this manner. With that, let's move on to our first quarter results. First quarter adjusted diluted EPS of $1.43 was at the higher end of our outlook range. These results reflect favorable freight costs and careful expense management during the quarter. You've heard me say many times that the 3 key fundamentals in retail are growth in transactions, sales per square foot and units. And I'm pleased to report all 3 of these metrics continue to move in the right direction. Let me now cover some key financial highlights from the quarter. On a consolidated basis, net sales increased 4.2% to $7.6 billion. Enterprise comp was 1% and as a 2.1% increase in traffic was partially offset by a 1.1% decline in average ticket. In both segments, comp growth was driven by traffic gains that were partially offset by lower average tickets. The average ticket declines reflected weaker discretionary demand, particularly in the Dollar Tree segment. Looking at performance by banner. Dollar Tree comps increased 1.7% on a 2.8% increase in customer traffic, partially offset by 1.1% decrease in average ticket. Dollar Tree's consumable comp was 7.4% and its discretionary comp declined 3.2% while a 7.4% consumables comp is respectable in its own right, it is worth noting that this came on top of a 6.9% consumables comp last year. On the other hand, this was the first discretionary comp decline we've seen at Dollar Tree since the first quarter of 2020 at the outset of the pandemic. Dollar Tree's quarter 1 comp came in below expectations because Easter was especially challenging for us this year. Easter is historically a major driver of discretionary demand -- in fact, to put things in perspective, Easter discretionary sales represent about 1% of our annual sales. For the largest retailers, that figure is closer to 0.1%. Looked at another way, Easter is 10x more important to Dollar Tree than it is for other retailers. This year, in early Easter, combined with the extra week in our fourth quarter last year left us with a much shorter selling season. Also unusually cold and wet weather throughout much of the country negatively impacted the way many families celebrate this traditionally spring-oriented, outdoor centric holiday. In fact, recent consumer research showed that Easter gatherings were down 20% this year and that 6 million fewer American households purchased Easter products in 2024. This dampened consumer demand across our seasonal discretionary assortment, which caters heavily to these types of celebrations. We also saw related softness in non-Easter discretionary categories like garden supplies, outdoor toys and other seasonal items. While the calendar shift was contemplated in our first quarter comp guidance, the unusual weather was not. Overall, the soft Easter highly influenced the monthly cadence of our quarter 1 comp. It's also important to note that this softness was Dollar Tree specific and concentrated in the 8 to 10 days prior to Easter. Comps before and after that were essentially in line with our quarterly expectations. All in, we believe Easter was a 150 basis point drag on Dollar Tree's first quarter comp. Despite this, Dollar Tree took meaningful consumable market share in the quarter with our dollar growth exceeding the market by 660 basis points and our unit growth exceeding the market by 520 basis points. Last quarter, I announced the next phase of our multi-price strategy called more choices. As part of this program, we are expanding our multi-price assortment by over 300 items at price points above $1.25 and approximately 3,000 Dollar Tree stores by year-end. Importantly, these multi-price items are being fully integrated into aisles throughout the store rather than concentrated in a single center store aisle. Before I expand on this program, let me take a moment to reiterate what multi-price is and what it is not. Multi-price has never been about raising prices on existing items. It's about adding new items at new price points that are incremental to our core assortment. Multi-price offers our customers the high-quality products that they've come to expect at price points that represent a compelling value proposition in the categories that are most relevant to them. Multi-price is designed to complement our core $1.25 strategy, not replace it. Even as we expand our multi-price assortment, we expect that at least 80% of the items in any Dollar Tree store will remain at that entry level price point. Now back to the rollout. By the end of the quarter, we had converted roughly 10% of Dollar Tree stores to the new in-line multi-price configuration. To date, we are pleased with the performance of this latest group of stores, which are outcomping our $1.25 only in Dollar Tree Plus stores. As we roll out our latest concept to 2,000 more stores over the balance of this year, we are proactively taking steps to minimize any operational disruption by using teams of dedicated third-party specialists to complete the conversions. I'm excited about our multi-price journey. Post-conversion comps are running at or above expectations at the vast majority of stores that we have transitioned. That said, there is a bit of a learning curve with multi-price as we evolve from our fixed price legacy. This is a new discipline for us and it will take us a little bit of time to fully build out our core competencies. But we're off to a good start. And so far, I'm pleased with the customer response to our new offerings. Shifting over to Family Dollar. Top line performance in quarter 1 was in line with our expectations. Comps were up 0.1% as we cycled a 6.6% comp in quarter 1 of last year. Customer traffic increased 0.9%, which was partially offset by a 0.8% decrease in average ticket. Both traffic and ticket trends improved on a sequential basis as the multiple merchandising initiatives and growth strategies we've launched over the past several quarters continue to progress. Family Dollar's consumable comp was up 1.4% and its discretionary comp was down 4.7%. While Family Dollar's discretionary comp is still negative, it is worth pointing out that the underlying trend has gradually improved. The pace of mix shift towards consumables of Family Dollar has definitely slowed. And since quarter 1 of last year, our 2-year stack discretionary comp has improved by 1,000 basis points. While our lower income consumers continue to deal with inflation, higher interest rates and reduced government benefits. We are encouraged that the worst of the SNAP headwinds appear to be behind us. While lower SNAP benefits were a meaningful 280 basis point drag on Family Dollar's first quarter comp, this was a 200 basis point sequential improvement over the quarter 4 SNAP headwinds. Similar to Dollar Tree, Family Dollar also continues to gain consumables market share with our dollar growth exceeding the market by 180 basis points and our unit growth exceeding the market by 80 basis points. Lastly, on Family Dollar, let me take a moment and update you on the portfolio optimization. We closed 506 underperforming Family Dollar stores in the first quarter. The remaining 90 or so stores we identified in the initial round of closures were closed in May. None of the stores that closed in quarter 1 are included in our comp results, although any revenues and expenses from the time they were opened are included in our quarter 1 P&L. Before I turn things over to Jeff, I want to again emphasize that our operating performance in both segments remain strong. At Dollar Tree, we continue to acquire new customers and gain market share as our next generation of multi-price resonates with a broader base of consumers. And at Family Dollar, we believe the decisive actions we took to solidify the portfolio will have a positive impact on operations in return. As a more streamlined organization, I am confident that Family Dollar's best days are ahead of it. based on the wide range of growth initiatives that are in place. With that, I'll turn the call over to Jeff.
Jeffrey Davis:
Thank you, Rick, and good morning. I will start by discussing our first quarter results, after which I'll provide comments on our Q2 and fiscal 2024 outlook. Where applicable, I will focus on our adjusted results. A reconciliation of non-GAAP adjusted results is provided in our earnings release.
Let's begin by looking at the business on a consolidated basis. Net sales increased by 4.2% to $7.6 billion. Adjusted operating income was $436 million, a 3% decrease from last year. Adjusted operating margin decreased by 45 basis points reflecting a 30 basis point increase in gross margin, offset by a 75 basis point increase in adjusted SG&A rate. Gross margin improvement came from lower freight costs, partially offset by unfavorable sales mix and elevated shrink. Adjusted SG&A increased primarily from temporary labor for Dollar Tree's multi-price rollout, higher depreciation and amortization and sales deleverage. Adjusted Q1 SG&A this year exclude $17.5 million of severance and other store closure costs and a $2.5 million reversal of a legal accrual. Q1 last year excluded a $30 million legal accrual. Our adjusted effective tax rate was 24.2% compared to 23.3%. Adjusted net income was $312 million, and adjusted diluted EPS was $1.43. Moving to our business segment results. Dollar Tree's net sales increased 5.9% to $4.2 billion. Operating income decreased 3% to $522 million. Operating margin decreased 110 basis points, driven by a 10 basis point increase in gross margin offset by a 120 basis point increase in SG&A rate. Gross margin improved primarily from lower freight costs. This was partially offset by unfavorable sales mix and elevated shrink. SG&A expenses increased primarily due to temporary labor for the multi-price conversions, higher depreciation and amortization and sales deleverage. Family Dollar's net sales increased by 2% to $3.5 billion. Adjusted operating income was $51 million, a 32% increase from last year and adjusted operating margin increased 30 basis points. The increase was all attributable to gross margin as the adjusted SG&A rate was flat at 23.7%. Gross margin increased primarily from lower freight, partially offset by product cost increases and an unfavorable sales mix. Moving on to the balance sheet and free cash flow. Inventory decreased by 2% or $103 million. On a related note, in the quarter, we recorded a $70 million loss related to the book value of inventory destroyed at our Marietta distribution center and a $47 million loss related to property and equipment destruction. Given our expansive scale and breadth of operations, our insurance policies include significant property and inventory coverage above cost. Based on the catastrophic nature of this event, we expect these losses to be fully offset by insurance recoveries. As our recorded losses were fully offset by the insurance receivable, there was no net impact to the first quarter P&L. With cash and cash equivalents of $618 million and long-term debt of $3.4 billion. Our balance sheet remains strong. Our bank-defined leverage at quarter end stood at approximately 2.3x, which continues to underpin our investment-grade credit worthiness. Regarding cash flow, we generated $696 million from operating activities compared to $752 million last year. Capital expenditures were $472 million in the quarter versus $350 million last year reflecting accelerated new store openings and ongoing investments in growth and other initiatives. Notwithstanding the higher CapEx spending, we generated $224 million in free cash flow in the quarter compared to $402 million last year. Consistent with our disciplined approach to capital allocation, after investing in the growth of our business, we returned $310 million to our shareholders by repurchasing 2.5 million shares at an average price of $122 per share. At quarter end, we had approximately $1 billion remaining under our existing share repurchase authorization.
Now let me provide some perspective on our second quarter and full year expectations. Our current outlook reflects the following:
we expect to incur additional operating expenses related to the loss of our Marietta DC. The EPS impact of incremental transportation and other costs is estimated to be approximately $0.10 in Q2 and approximately $0.20 to $0.30 on a full year basis. As more information on the costs associated with this disruption becomes available, we may revisit this outlook in subsequent quarters. The expected impact of freight, shrink, mix, and SNAP on our full year adjusted EPS outlook remains consistent with the expectations we outlined last quarter.
Additionally, given the relatively low level of our freight volume that is subject to spot rates, we believe our exposure to recently observed volatility in the global shipping markets is limited and may be partially offset by favorable domestic carrier cost. With that as a background, for the second quarter, we expect net sales will be in the range of $7.3 billion to $7.6 billion based on a comparable net sales growth in the low single digits for the enterprise, 2% to 4% for Dollar Tree segment and approximately flat for the Family Dollar segment. Adjusting for the stores that were closed as part of the portfolio optimization. We expect second quarter net sales for the Family Dollar segment to decline by 1% to 3% on a year-over-year basis. We expect adjusted EPS will be in the range of $1 to $1.10, which reflects the incremental operating expense associated with the loss of the Marietta DC. For the full year, we still expect net sales to be in the range of $31 billion to $32 billion. Although at this point in time, we think we are more likely to be in the lower half of that range. We still expect comparable net sales growth in the low to mid-single digits for the enterprise, the mid-single digits for Dollar Tree segment and the low single digits for the Family Dollar segment. Adjusting for stores closed as part of the portfolio optimization, we expect full year net sales for Family Dollar to decline by 1% to 3% on a year-over-year basis. Adjusted EPS for the full year is now expected to be in the range of $6.50 to $7, again, reflecting the incremental operating expenses associated with the loss of Marietta. Our outlook for Q2 in the fiscal year does not include any severance or additional incremental costs related to the portfolio review or related workforce reductions. It also excludes any future share repurchases. In the interest of time, I will direct you to our supplemental financial presentation, which is available on our IR website for the remaining details that support our current guidance. With that, I'll turn the call back over to Rick.
Richard Dreiling:
Thanks, Jeff. We are pleased that we delivered first quarter adjusted EPS results towards the high end of our outlook range. At Dollar Tree, we overcame some Easter softness and remain focused on rapidly rolling out our next generation of multi-price stores. At Family Dollar, we are taking the difficult but necessary steps to position the business for long-term prosperity. Change is never easy, and I couldn't be prouder of our 200,000 associates across Dollar Tree and Family Dollar for their ongoing commitment to their communities and the customers that they serve. I am truly honored to lead and be part of 1 of the best teams in retail.
Operator, with that, Jeff and I are ready to take your questions.
Operator:
[Operator Instructions] Our first question today is coming from the line of Edward Kelly from Wells Fargo.
Edward Kelly:
So I wanted to start with Dollar Tree. You've maintained the mid-single-digit comp guidance for the year. Q1 was obviously a little bit softer. Can you just help us what underpins the confidence around that?
And then, Rick, as it relates to this concept, obviously, there's a lot going on with multiple price points, you're accelerating growth. Can you give us a little bit more perspective on how you see the future of this business? What do you think the earnings growth profile is here over a multiyear basis and the real opportunity?
Richard Dreiling:
Yes, sir. I'll take the first part and you can add the second part. The confidence I have in Dollar Tree as we move through the year is the impact of multi-price point. We continue to see trade down customers into that brand. I love the traffic -- and the multi-price stores, Ed, are out-comping the stores that have no multi-price in them, and they're outcomping the stores that have the valley of multi-price.
We continue to be pleased with where we're going with consumables, and we also see nothing but upside in regards to the basket as we introduce these new items. So I'm very, very bullish on the Dollar Tree side. And by the way, just for a reference point, the basket, when there's a multi-price item, and it is 2x larger than our normal basket. And they also multi-price is driving more trips into the stores. And you've heard me repeatedly talk about transactions are 1 of the key drivers of the future.
Jeffrey Davis:
Just to maybe add a couple more points on the multi-price before going into longer-term profitability. On the multi-price, we mentioned that we had roughly 10% of the stores that have been converted to the in-line conversion. That happened over the course of the first quarter those stores are still ramping up. We will still continue to roll that out for another 2,000 stores in the rest of the year that ramp-up will give us some additional sort of tailwind, if you will.
On top of that, our comps, I don't know if you've noticed, and you probably have by looking at some of the things that we've published before, but our comps actually get to be a little softer in comparison in the back half of the year versus the first half of the year with the second quarter being our most stringent sort of compare. The second part of your question, I believe, was with respect to how we're thinking about the long-term profitability of the enterprise and the brand. And we continue to be very encouraged by what we're seeing across both banners. The multi-price offering is allowing us to drive sales and volumes to drive greater profitability. We continue to deliver from a standpoint of higher freight cost. We believe that there's opportunity across the Family Dollar brand to continue to drive greater gross margins as we continue to drive continued improvement in private label as well as the OTC and HBA. The combination of these things will allow us to drive greater gross profit dollars in the organization as we continue to drive greater discipline in our expenses along the way. So the outlook that we have for the year, we feel very confident in. There's the opportunity to manage through some of this. So at this point, we really don't have any additional outlook considerations to provide other than the fact that we continue to remain on the numbers that we've given you so far.
Operator:
Our next question is coming from Michael Lasser from UBS.
Michael Lasser:
My question is a 2 parter on the strategic process. If you are not able to sell Family Dollar what is the plan B? And as a way to help us frame what the ongoing earnings power of the business could look like, can you give us a sense of how much the corporate overhead is allocated to Family Dollar and what the dissynergies might be if you were to divest the Family Dollar business.
Richard Dreiling:
Michael, thank you for the question. It's too soon in the process for me to say what's going to happen or exactly what all the alternatives are. So I'd like to stay away from that and come back to my original comment that I promised to keep you all updated. In terms of how the corporate overhead is basically, I think in terms of 50-50. I would also look at you and say that the business, the supply chain, merchandising and retail are all pretty much separate. There is some legal, HR, the basic functions are a little intertwined, but the most important pieces are not. Jeff, I don't know if you have anything you want to add to that?
Jeffrey Davis:
I think that covers it.
Operator:
Your next question today is coming from Matthew Boss from JPMorgan.
Matthew Boss:
So a couple of questions, 1 near-term, 1 multiyear. So at the Dollar Tree banner, near-term, just thinking about the 2% to 4% comp guidance for the second quarter, what trends have you seen post Easter? Maybe if you can comment on quarter-to-date just to provide some confidence around the 2% to 4% relative to the first quarter.
And then multiyear, Rick, could you just elaborate on the acceleration strategy at Dollar Tree? Maybe speak to the acquisition? Is there any ceiling to consider in terms of annual unit growth and just how you're thinking about long-term saturation for that concept?
Richard Dreiling:
Yes. A couple of great questions there. Do you want me to take the first question?
Unknown Executive:
Yes, I'll let the first one, I'll take the second one.
Jeffrey Davis:
So Matt, the guidance that we gave of 2% to 4% comp for the Dollar Tree banner coming out of Q1, we're in line with that guidance that's the reason why we've provided it. As we came out of that Easter period, and we had mentioned in our prepared remarks that in the absence of 8 to 10 day period, we actually pretty much through the course of the quarter, had a comp that was pretty reflective of a mid-single-digit comp -- I'm sorry, a low to mid-single-digit comps. So I think we're still in line with that as we move into Q2.
Richard Dreiling:
And in regards to the long-term future of the company, you look at $0.99, the acquisition there totally reflects Matt our commitment to the Dollar Tree franchise and the fact that we think that there are opportunities there to grow the business even more.
The acquisition in California to be very frank, is going to generate returns above our average in the overall chain. And we are very excited about these stores in terms of the real estate that we were able to acquire in the term we have on them. And as we've said on many occasions, a well-run Dollar Tree is an exceptionally powerful retail format. And we are committed and I actually think I'm going to say this, multi-price is attracting a higher-income consumer into that box. And I think we have a lot of really good things moving together right now.
Operator:
Next question is coming from John Heinbockel from Guggenheim Securities.
Unknown Analyst:
This is actually Anders Meyer on for John. So I just wanted to touch on the cooler resets. So overall, how have they been progressing? What has been the overall impact to comps? And upon completion, how do you size the sales opportunity with this product?
Richard Dreiling:
Yes. I mean the cooler work we're doing is basically on both franchises incredibly pleased with what's going on in the Family Dollar banner. We're pooling the number of cooler doors up to approximately 30. And it is driving incremental sales into the store overall.
And the consumer is moving more to refrigerated and frozen product. Now on the Dollar Tree side, we now have 5,700 stores that have multi-price frozen food in them. We've expanded the assortment in 1,900 stores and to be very frank, one of the big surprises for us is frozen and refrigerated in the Dollar Tree banner. The multi-price unlock that category and you have to think about it. You go into a Dollar Tree, you can buy a pizza for $4 or $5 that feeds a family of 4. And that is a very powerful statement. So very pleased continuing to push it. It's where the consumer is going and both banners are chasing it.
Operator:
Our next question is coming from Simeon Gutman from Morgan Stanley.
Simeon Gutman:
I want to ask about Family Dollar, but be respectful if you can't answer, I'll put a second question about Dollar Tree in as well. I wanted to ask if the EBIT that we see in the P&L, I think it's going to get a little bit better. You're going to run rate a little bit better from what the leftover stores look like.
Can you tell us if there's a big distribution call it, among the 7,000 remaining Family Dollar stores, a wide range of profit outcomes or if they're relatively concentrated. And then are you able to share what the average life of the leases are in that portfolio? And then have you talked about or can you share what the lease break costs could look like?
Jeffrey Davis:
Let's see if I can take a few pieces of that.
Richard Dreiling:
And then I'll take the couple.
Jeffrey Davis:
Some of this, of course, we aren't in a position to share, but I can tell you that as you look at the remaining portfolio of stores, you still have a sort of a distribution of profitability across those stores at a much higher level than what you would have had before we closed the nonperforming stores.
We had already indicated also that for the year, you should expect about $0.15 of additional profitability -- increased profitability coming from those closed stores and $0.30 of EPS on an annualized basis. Our leases that we enter into are normally somewhere between 5 to 10 years on average. At any one point in time, approximately 10% to 12% of those leases are being renewed on an annual basis. And that's about what I can really share with you at this point with respect to the lease obligations.
Richard Dreiling:
And the 1 thing I would say as you reflect on this announcement is the fact that we have not lost faith in Family Dollar and the progress it's making. The team has done a great job of implementing many initiatives that are designed to drive the long-term growth. What we're wrestling with and trying to figure out is we have 2 different brands at 2 different stages of where they're at in their development.
And while we want to accelerate Dollar Tree, we want to position Family Dollar's transformation where it has the chance to grow. And by looking at them differently that might provide more acceleration for both brands long-term.
Operator:
Next question today is coming from Rupesh Parikh from Oppenheimer.
Rupesh Parikh:
So just going back to your commentary on multi-price point expansion. We've been in some of your newer locations with the new product. Just any surprises in consumer behavior that you're seeing in store, what type of consumer feedback are you guys seeing with those -- with that expansion?
And then just want to get a sense how the consumables versus discretionary mix is playing out versus expectations within those locations.
Richard Dreiling:
Yes. A couple of great questions. Our biggest problem with multi-price right now is we can't keep it on the shelf. The consumer is responding to it. The consumer likes it. And I think it's going to be -- I don't think, I believe, truly believe it is going to be a very powerful piece in our ongoing future.
You will see, as we move through the calendar year, as you guys know, we have to buy multi-price products, seasonal product more than a year in advance as we get into the holidays, you're going to see more multi-price show up on the discretionary side. I am pretty positive for the first time, we'll have an inexpensive Christmas tree in our stores that will probably have Christmas lights that will go with all the Christmas decorations we sell. In regards to consumables, multi-price points, again, are driving what's going on with our consumable share. And what we are committed that we are not raising the price or introducing like items we are bringing in different SKUs, which broadens the appeal of the assortment to the consumer.
Jeffrey Davis:
I had just 1 other point. with multi-price, as we're looking at those stores that have had this in-line conversion, the mix of discretionary and consumables is more in line with what we would have seen historically with a heavier balance on discretionary than consumables. So we like that balance in that the multi-price is not only driving consumables, but it's also lifting the discretionary basket also.
Operator:
Your next question today is coming from Paul Lejuez from Citigroup.
Paul Lejuez:
Just a follow-up on that last comment. What is the change that you see in terms of traffic versus ticket in the multi-price converted stores. That's my first follow-up. .
And second, I'm curious what you're seeing in the promotional landscape. What do you see in 1Q versus your expectations, but also curious what you assume for the rest of the year and what you've seen -- based on what you've seen year-to-date on the promotional landscape out there.
Richard Dreiling:
So with -- the first part of the question is, we see traffic increase in the multi-price stores to the tune of about approximately 3%, and we also see the ticket goes up about 55 bps. And again, it's soon. Again, I want to come back to, we're building a new muscle. I would look at you and say, off the top of my head, I'm guessing the old retailer in me. 50% of the stores are probably outperforming our expectation, maybe 25% are right on it and 25% have opportunities.
Jeffrey Davis:
And look, we're definitely seeing the customer right now buying a little bit more on promotion. And it's not that there is more promotional activity, but what the customer is actually buying is items on promotion.
Richard Dreiling:
And I think what's important on the promotion thing is that Jeff is in my office every Monday asking me what's going on in the promotional landscape, we have seen nothing irrational at this time. And I think that's really important.
And what we are seeing is maybe incremental movements on CSD, soda pop and 2-liter pop. And that is a very easy traffic driver. But I always remind everybody I talk to, we have to not confuse marking down stale inventory with promotional activity. And I think that's really, really important. So stable environment, I would say it's not irrational and maybe CSD.
Operator:
Next question today is coming from Chuck Grom from Gordon Haskett.
Charles Grom:
So Rick, on the new multi-price rollout, can you talk about the transition once the third-party specialists have actually done the reset? In other words, what's the risk and you talked about the new discipline that store managers and employees are going to need to acquire post those specialists doing the initial reset.
And then for Jeff, how much of the SG&A deleverage in the first quarter was from the resets? And I think you guys have outlined $23 million of expenses this year. Can you just talk about the phasing of that?
Richard Dreiling:
Yes. Chuck, again, a couple of great questions. First one, I'll take. We have grown up in an environment in this company where everything is the same price point, so it doesn't matter where it goes, and it doesn't matter what the customer does with the product if they decide they don't want it.
Now what we have to do is -- and what we're doing is we're introducing the multi-price SKUs into the category that they belong in. We're not just putting them in the center of the store. So you have to create a section, quite frankly, that bears prices, so the consumer knows how much they are. And when the consumer changes their mind, that product has to get back into the right spot on the shelf. And that's all about teaching our associates how to handle that product in regards to stocking it and then what to do with it when they condition the store. Now it's a very comparable discipline but it's not something that we've had over the years. We're doing all kinds of things to manage that. We put a shelf label literally on the outside of the case that allows the associate to put the product on the shelf, put the shelf tag on the shelf. But believe it or not, we also have to teach the people in the warehouse when they pull the item, they had to pull the right item because they're used to pulling 1 item that has the same price and in regards to the store's inventory, it stays true. But now the difference is if they're pulling a multi-price point item, it has to get there as it was supposed to be selected.
Jeffrey Davis:
And then, Chuck, with respect to the SG&A, margin deleverage, if you will. This is really 3 components. You called out the temporary labor was absolutely the largest component. The second component was higher depreciation and the third component was just sort of deleverage as a result of the lower comp. The 1 thing to recognize with the temp labor in the first stores that we opened up. There's a learning curve as to the -- how to go about it the number of crews that were actually allocated, how working with the store leadership teams.
We continue to make progress on that in the subsequent stores that we're rolling out. So sort of the initial headwind that we had in the first quarter here, we would expect that to moderate over time. But as we had mentioned earlier, we definitely thought that the impact of using this third-party labor to do the in-line conversions was going to cost us approximately $0.23 of EPS for the year.
Operator:
Our next question today is coming from Seth Sigman from Barclays.
Seth Sigman:
I want to talk about shrink. It hasn't come up a ton. It was a headwind this quarter, but I think that was expected. Just curious how that played out with some of the mitigation efforts, any signs of stabilization given that you didn't change the guidance for that?
And then I guess a question on gross margin overall the improvement was a little bit more limited this quarter. I'm just curious, was that mix or something else? If you could just help us with that?
Richard Dreiling:
Yes, I'll take the shrink question, if that's okay. I think the efforts we've put in place for the first time, I can honestly say the shrink trends that we have, why they still are not good they're not getting away from us anymore. We're definitely tracking in the right direction. But I want to reinforce, shrink is still a problem, but it's not deteriorating like it was last year. We feel very good with the initiatives we've put in place. I also think it's fair to say that we were ahead on the shrink curve that we were calling it out and we were taking steps that people now are taking around us.
Our self-checkout exposure is basically nothing. So we don't have to revisit that. We have started eliminating high-shrink SKUs. We started that about a year ago. And we've also placed things behind the check stand counters where we can control them. So I'm pleased we are not out of the woods, but at least I can tell you that it has stabilized.
Jeffrey Davis:
Yes, just to put maybe a little bit of finer point on it. Our expectation for the first half of the year was that we were going to have about $0.30 to $0.35 of headwind across shrink and mix and that was predominantly going to be on mix. What we're seeing is that our performance is in line with that. We're actually seeing some slight improvement against it, but we're still early in the year. So as Rick has said, the investments that we were making -- and we did a lot of that on the Family Dollar side. First is a proof of concept and now growing some of those self-help opportunities across the Dollar Tree banner also.
As it relates to gross margin, the gross margin pressure really from Dollar Tree was really more as a result of consumable mix by not having that discretionary Easter complement in our overall performance for the quarter is what really put pressure on the gross margin. On the Family Dollar side, very healthy improvement in gross margins overall of 40 basis points. So notwithstanding the impact of Easter, we're very happy with where we're trending as it relates to our gross margins.
Operator:
Our next question today is coming from Krisztina Katai from Deutsche Bank.
Krisztina Katai:
So I wanted to ask you about the supply chain. You've been making a lot of investments there. You have rotacarts that are making store deliveries now as part of your fleet. Can you talk about what are some of the early benefits that you're seeing so far regarding in-stock availability, inventory turns is it helping reduce shrink and transportation damages? And just how best to think about the overall labor hour savings that you're able to take from the supply chain investments and then reallocate the store hours?
Richard Dreiling:
Yes. There's a lot there. Let me see if I can distill it down to just a couple of elements. The first DC that we rolled out was Matthews, North Carolina. It was a Family Dollar DC -- it's 1 in which previously they were delivering to the store off of pallets. So now we're doing it off of rotacarts.
What we're actually seeing is improved delivery time on low time, which is what we were anticipating. We are also seeing a level of reduced damages, as you had mentioned, is the way that this product is being handled. And we're also seeing a higher level of associate sort of engagement and satisfaction, recognizing that it is helping to improve the way that they do their jobs. The next DC that we just really kicked off is here in Chesapeake. It's a Dollar Tree DC we're seeing a nice once again, reduction in unload times. It's allowing us now to get product to the shelf quicker and to basically fulfill some of the outs that we have on the shelf. But overall, the in-store in-stocks are improving as well as the DC service levels to these stores.
Operator:
Our next question is coming from Michael Montani from Evercore ISI.
Michael Montani:
I just wanted to ask kind of 2-part thing. One was there's an improvement implied in the back half for EBIT margin of 100 bps plus versus potentially flattish in the front half. So just wanted to see the top couple of drivers of that, that gives you the conviction for that.
And then as a follow-up, you all did the incremental acquisition for the 99 Cent stores, as you mentioned. So is it feasible to see kind of $10 plus of EPS power just from core Dollar Tree now as you think out.
Richard Dreiling:
So I'll let you handle the first part of the question. The second part of the question, it's too soon to know that. I'd like to stay away from that for now, if that's appropriate. Go ahead.
Jeffrey Davis:
And Michael, as we think about sort of the phasing of our overall EPS for the year, I appreciate your question. It really kind of can get bucketed into a couple of areas. From a top line perspective, we talked about multi-pricing the acceleration of that as we continue to roll out the in-line conversions.
You also have shrink in mix is for us we believe will be more neutralized in the back half of the year than in the front half. And we -- once again, that $0.30 to $0.35 of EPS headwind was really on the first half. We also believe that from a SNAP perspective, while SNAP is still within our expectations. In the back half, we think that we may have some tailwinds as a result of the October cola adjustment that may be available -- will be available this question is how much. And then the last component is, if you remember last year, in the back half of the year, we had a couple of foot faults, if you will. We had an OTC recall that was about $0.05 of EPS. We had an accrual adjustment that we needed to make on general liability, very specifically around some of the claims that we're going back to pre-pandemic, that was around $0.17. And then last but not least, as we had mentioned, with the portfolio optimization, we are expecting a $0.15 EPS improvement. That is predominantly going to be in the back half of the year. So on balance, as a result of top line acceleration of revenue growth, and then some of the softer compares against some of these elements with respect to shrink and SNAP and then the last components are those foot faults, which we believe were onetime in nature.
Operator:
Our final question today is coming from Priya Ohri-Gupta from Barclays.
Priya Ohri-Gupta:
I know it's a bit early in the process, but I was just hoping that perhaps you could talk to us a little bit about how you're thinking about sort of your credit rating with regard possible considerations for Family Dollar? Would the expectation be to try to maintain your existing rating as you consider these various alternatives? Or would it be to at least maintain investment grade.
Richard Dreiling:
Yes. So our investment-grade rating is an important element of our overall sort of financial policy, if you will. We believe that it's too early to get out ahead of ourselves as to what a structure may be or the ultimate outcome of the strategic review. But we believe that given the underlying business, the power of the cash flows generated by this business, the growth -- and quite honestly, how we basically execute our capital allocation is all in line with keeping us in an investment-grade level.
Operator:
We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further closing comments.
Richard Dreiling:
Thank you all for taking your time to talk to us today and look forward to catching up down the road.
Operator:
Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.
Operator:
Hello, and welcome to the Dollar Tree Q4 2023 Earnings Call. [Operator Instructions]
At this time, I'd like to turn the call over to Bob LaFleur, Senior Vice President, Investor Relations. Please go ahead, sir.
Robert LaFleur:
Good morning, and thank you for joining us today to discuss Dollar Tree's fourth quarter results. With me today are Dollar Tree's Chairman and CEO, Rick Dreiling; and CFO, Jeff Davis.
Before we begin, I would like to remind everyone that some of the remarks that we will make today about the company's expectations, plans and future prospects are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties, which could cause actual results to differ materially from those contemplated by our forward-looking statements. For information on the risks and uncertainties that could affect our actual results, please see the risk factors, business and management discussion and analysis of financial condition and results of operations section in our annual report on Form 10-K filed on March 10, 2023, our most recent press release, and Form 8-K, and other filings with the SEC. We caution against reliance on any forward-looking statements made today, and we disclaim any obligation to update any forward-looking statements, except as required by law. Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations of those non-GAAP items to the most directly comparable GAAP financial measures are provided in today's earnings release available on the IR section of our website. These non-GAAP measures are not intended to be a substitute for GAAP results. Unless otherwise stated, we will refer to our financial results on a GAAP basis. Additionally, unless otherwise stated, all comparisons discussed today are for the fourth quarter of fiscal 2023 or against the same period a year ago. Please note that a supplemental slide deck outlining selected operating metrics is available on the IR section of our website. Following our prepared remarks, Rick and Jeff will take your questions. [Operator Instructions] I'd now like to turn the call over to Rick.
Richard Dreiling:
Thanks, Bob. Good morning, everyone. This past year, our organization made meaningful progress in the ongoing transformation of our core business, which includes building a foundation for sustainable growth. While I have been Chairman and CEO for a year now, we are still in the early stages of this transformation journey. We're off to a good start and we remain focused, and we are excited about the remaining transformation work that lies ahead of us.
You've heard me say that sales per square foot, transactions and units are among the most important benchmarks in retail. I am pleased to report that we are seeing growth across all three, and momentum is building across the business. We are making progress on the operational objectives of our transformation. And in some areas, we are seeing positive results earlier than we expected. While the transformation process is dynamic, we remain focused on delivering against our core growth objectives and as always, navigating through the challenges we encounter along the way. As I previewed on our last call, we are also taking decisive steps to strengthen the Family Dollar brand and better position it to achieve its full potential. We took a thoughtful and deliberate approach to address underperforming stores by considering each individual store's performance, local operating environment, and our broader need for scale and operating efficiencies across the portfolio. As part of the portfolio review process, we have identified approximately 600 Family Dollar stores that we will close in the first half of fiscal 2024. Additionally, approximately 370 more Family Dollar, and 30 Dollar Tree stores will close at the end of each store's current lease term. We believe rationalizing these unprofitable locations will help to unlock meaningful value at the enterprise level. Collectively, we estimate that net sales loss from the stores we intend to close this year is approximately $730 million on an annual run rate basis. On the other hand, given their historical underperformance, we would get back approximately $0.30 of annual run rate EPS net of any stranded costs. Now, let me shift gears and discuss our fourth quarter results. On a consolidated basis, net sales increased 12% to $8.6 billion, including a $560 million benefit from this year's 53rd week. Enterprise comp grew by 3% with 4.6% higher traffic, offsetting a 1.5% lower ticket. Adjusted operating income increased by 21% to $749 million. Adjusted EPS grew 25% to $2.55. While our quarter 4 reported EPS on an adjusted basis was below our quarter 4 outlook, these results include $0.17 of net costs, primarily related to actuarial insurance adjustments that were not contemplated in our outlook. Jeff will provide more detail on this in his remarks, but without these unanticipated costs, quarter 4 operating results exceeded our expectations. Looking at performance by banner. Dollar Tree segment comps were up 6.3% on 7.1% more traffic, and a 0.7% decrease in ticket. Traffic and ticket both improved sequentially. This strong quarter 4 comp came on top of an 8.7% comp last year. Dollar Tree's consumable comp was up 10.8%, and its discretionary comp was up 3.1%, a 200 basis point sequential increase from quarter 3 and an impressive accomplishment given the general weakness in discretionary demand across retail. The quarter's consumable comp came on top of a 9% comp last year. As pleased as we are with Dollar Tree's quarter 4 performance, it's worth noting that we believe January's winter storms negatively impacted comp by about 70 basis points. In quarter 4, Dollar Tree continued to take unit market share in consumables. According to Nielsen, our unit volume grew 8%, while the market declined 1.5%. These strong gains in traffic and market share are supported by Dollar Tree's ability to attract new and higher income customers. Continuing recent trends, Dollar Tree added 3.4 million new customers in 2023, mostly from households earning over $125,000 a year. We attribute Dollar Tree's exceptional performance to the range of initiatives we have been implementing. One of the most important initiatives at Dollar Tree is our multi-price point strategy, which we're calling More Choices. The underlying premise here is that we can present a more relevant assortment to our customers if we are free to offer items at a variety of price points. Here, we are making tremendous progress. We have substantially completed the rollout of $3, $4, and $5 frozen and refrigerated items, which are now available in more than 6,500 stores. Today, we typically offer multi-price frozen product in 3 coolers within our usual 10-cooler bank. Over time, that will evolve to 8 out of 10 as we expand the assortment. By the end of 2023, we introduced $3 and $5 center store merchandise to approximately 5,000 Dollar Tree stores, and expect to add another 2,000 stores this year. We are especially excited about the next phase of our multi-price expansion strategy. Dollar Tree's Chief Merchandising Officer, Rick McNeely and his team, are continuously working on new ways to deliver value while expanding our assortment across a wider range of price points. This expanded assortment will offer Dollar Tree shoppers a wider range of choices across a variety of categories, including food and snacks, beverages, pet care, personal care and more. This year, across 3,000 stores, we expect to expand our multi-price assortment by over 300 items at price points ranging from $1.50 to $7. But even as our multi-price assortment expands over time, the vast majority of the items sold in Dollar Tree stores will remain at our entry-level fixed price point. Over time, you will also see us fully integrate multi-price merchandise more into our stores so our shoppers will find $5 bags of dog food next to our traditional $1.25 pet treats and toys, and our $3 bags of candy will be found in the candy aisle. This is the next exciting chapter of the Dollar Tree value story, new items, more choices and more savings. Now let's turn to Family Dollar. Here, persistent inflation and reduced government benefits continue to pressure the lower income consumers that comprise a sizable portion of Family Dollar's customer base. Accordingly, Family Dollar's quarter 4 comp declined 1.2% as a 0.7% traffic increase was more than offset by 2% ticket decline. Family Dollar's consumables comp decelerated sequentially to 2.2% in quarter 4 from 6.2% in quarter 3. Discretionary comp was down a full 12%. As challenging as this was, it was a slight sequential improvement over quarter 3. Categories like apparel, home decor, electronics and general merchandise remain weak as lower income consumers continue to be very deliberate about their spending. Family Dollar continued to take unit and dollar market share in consumables even as lower income consumers struggle with reduced SNAP benefits and other macro pressures. In fact, we estimate the reduced SNAP payments for total quarter 4 comps by about 5 points, and when coupled with the weak discretionary demand, the comp impact was closer to 7 points. Looking forward, we expect reduced SNAP benefits will be a headwind through at least the first half of FY '24 before comparisons ease. While the operating environment remains difficult, I don't believe the challenges we face are structural, and I continue to believe that a well-run and well-located Family Dollar store is a powerful retail force. As I mentioned earlier, we are taking aggressive actions to address underperforming stores. Looking through the transient factors that weighed on comps throughout 2023, I am encouraged by the fact that in a more normalized operating environment, our comps would have been higher. We believe our ongoing market share gains are a strong validation of the many initiatives we have underway. We are gaining traction in the vast majority of stores where they've been implemented, and I continue to believe that the Family Dollar banner is well positioned for long-term improvement as we continue to focus on operational excellence and financial performance. Before I turn the call over to Jeff, I'd like to update you on some of the key milestones we have achieved so far in our transformation journey. In real estate, we opened 641 new stores last year, which was at the high end of our target of 600 to 650. Selling square footage increased 3.6%, which was ahead of target. We are placing a greater emphasis on Dollar Tree openings given the attractive returns and performance, and we expect the vast majority of our new store openings in fiscal 2024 will be Dollar Trees. I'm excited about the overall quality of our project pipeline for both banners. In supply chain, our DC in Matthews, North Carolina is now providing roto cart deliveries to approximately 600 Family Dollar stores, and we are also testing roto carts deliveries to Dollar Tree stores from our DC here in Chesapeake. By the end of this year, over 3,000 stores should be receiving roto cart deliveries from a total of 6 DCs, 4 for Dollar Tree, and 2 for Family Dollar. As expected, we are already seeing a meaningful reduction in unloading times at stores using roto carts, and we expect those efficiencies will continue to build. Expanding and modernizing our trailer fleet is an important part of the roto cart initiative. To this end, we added nearly 900 new trailers with lift gates to the fleet in 2023, and expect to add 2,000 more this coming year. By the end of 2023, 9 of our DCs were temperature controlled. By the end of this year, all 25 of our DCs should be either fully temperature-controlled or have dedicated temperature-controlled facilities on site. Temperature-controlled DCs help reduce cross-stocking costs and allow us to carry OTC and other temperature-sensitive products throughout our distribution network. They also increase productivity by providing associates with a safer and more comfortable working environment. And finally, we continue to make progress on our completely revamped Family Dollar DC in West Memphis, which should improve the overall efficiency of our distribution network. As you probably saw in the news last month, Family Dollar reached a resolution with the U.S. Department of Justice regarding its West Memphis DC, and we are pleased to have this situation behind us. As part of our ongoing transformation efforts, we continue to strengthen and enhance our food and product safety protocols and our compliance oversight. In our IT modernization, our new warehouse management system is up and running at its first DC. Concurrent with this rollout, we are also deploying and integrating our new transportation management and labor management system. Over time, we expect these enterprise-wide solutions to contribute to the optimization of our distribution network and labor efficiency. We have also installed new network infrastructure in over 3,800 stores, bringing improved Internet connectivity, security and in-store WiFi access to better support store operations. Since our last report, we have also begun implementation work on both our new enterprise-wide POS solution and our new human capital and payroll management system. We have also launched new mobile apps for both Family Dollar and Dollar Tree. The Family Dollar app allows us to offer more targeted promotions and a better customer experience. The Dollar Tree app gives shoppers the ability to see new products, view weekly ads, receive notifications about great deals and do price checks. In private brands, we launched approximately 250 new SKUs, and converted over 300 control brands to private brands. The private brand program is one of the most significant initiatives underway at Family Dollar. And I'm excited that we now have a highly competitive offering that expands our assortment across multiple categories and offers the Family Dollar consumer national brand equivalent products at compelling values. By the end of last year, our private brand penetration reached 15%, 100 basis points ahead of our target, and a great head start towards reaching our 20% goal by 2026. On category resets, I'd like to take this opportunity to recognize Family Dollar's Chief Merchandising Officer, Larry Gatta and his team for their efforts to expand and improve our merchandising assortment. By the end of 2023, we successfully raised the merchandise height profile to 78 inches across the banner, and optimize our assortment with the addition of approximately 900 net new SKUs. These efforts are already having a meaningful impact on our results, adding 130 basis points to our quarter 4 comp, which helped offset at least some of the impact from the softer macro environment and comparatively weaker discretionary demand. This reset was a major undertaking for Larry's team, and our new planograms will allow us to expand and improve our product assortment and help Family Dollar gain additional market share. We are also moving forward with our goal of increasing the number of cooler doors in Family Dollar stores. We added over 17,000 cooler doors last year, which was 1,000 doors above our target, and brought our average across the Family Dollar segment to 26 coolers per store, which is approaching our goal of 30 coolers per store. In summary, we continue to execute well around factors that we can control. I've said before that our progress on this journey will include challenges with the belief that we will succeed more often than not in our efforts, but the direction and destination remain clear, which is the long-term health and success of our business for the benefit of our customers, associates, stakeholders and partners. Our growth initiatives are central to this journey and we are focused on continually improving, even in the face of a rapidly evolving macro landscape. We have an outstanding team with a cultural foundation focused on service to the customer and improving our performance each and every day. We remain relentlessly focused on retail fundamentals and continue to take market share. While challenges and macroeconomic factors will always be part of any retail journey, we continue to face them head on as they arise. We're excited about where we are and optimistic about where we are headed. With that, I'll turn the call over to Jeff.
Jeffrey Davis:
Thank you, Rick, and good morning. I will first discuss our fourth quarter results. After which, I'll provide some details on the financial impact of the portfolio optimization, and close with our fiscal 2024 and Q1 outlook.
As I discuss our fourth quarter results, where applicable, I will focus on our non-GAAP adjusted results. A reconciliation between GAAP and non-GAAP is provided in our earnings release. Also, as a reminder, our Q4 and full year 2023 results include an extra week of operations, which gave us an incremental $560 million in revenue and $0.35 of EPS for the quarter and the year. In the fourth quarter, the Dollar Tree and Family Dollar segments increased traffic, unit volume and market share despite persistent headwinds from an unfavorable sales mix and reduced SNAP benefits. Looking at the business on a consolidated basis, net sales increased 12% to $8.6 billion. Adjusted operating income was $749 million, a 21% increase from last year. Adjusted operating margin increased by 70 basis points, driven by a 220 basis point increase in adjusted gross margin, and offset by a 150 basis point increase in adjusted SG&A rate. Adjusted gross profit increased 20% to $2.9 billion. Adjusted gross margin improvement was driven primarily by lower freight costs, occupancy cost leverage from the extra week, and higher vendor allowances, partially offset by product cost inflation, unfavorable sales mix and elevated shrink. Adjusted SG&A expenses increased primarily from ongoing labor investments, higher incentive compensation, unfavorable general liability claim development and depreciation, partially offset by leverage from additional sales from the extra week. Our adjusted effective tax rate was 23.1% compared to 23.4%. Adjusted net income was $556 million, and adjusted EPS was $2.55, which includes the $0.17 per share negative impact, primarily from unfavorable general liability insurance claims. Before I move on to segment level results, let me spend a moment to walk you through the non-GAAP adjustments in our Q4 results and shed some additional light on the $0.17 per share negative impact, primarily from unfavorable general liability insurance claims. The first non-GAAP adjustment was related to the portfolio review process. Here, we incurred total noncash charges of $594 million, including $86 million for inventory markdowns and $504 million for store asset impairments. We also incurred an additional $4 million of related fees. The second non-GAAP adjustment was a noncash impairment charge of $2 billion for Family Dollar, including $1.1 billion related to goodwill, and $950 million related to the trade name. The third non-GAAP adjustment was a $27 million charge within SG&A related to the resolution we reached with the Department of Justice regarding our West Memphis distribution center. This was in addition to the $30 million West Memphis reserve we recorded in Q1. Outside of the non-GAAP adjustments, Q4 results included $0.17 of net EPS headwinds related to items that weren't contemplated in our Q4 outlook. These items include negative adjustments to our general liability accruals, which were partially offset by favorable adjustments to workers' compensation liabilities and the elimination of certain rent and depreciation expenses as part of our Family Dollar impairment process. Adjustments to general liability accruals may sound familiar to many of you as we absorbed $0.07 of EPS impact from this issue in the second quarter of 2023. So let me explain why we are revisiting this in Q4. In the process of accruing for potential general liability exposure, predicting the outcome of both existing and unreported claims is inherently complex. We rely on third-party actuarial analysis to estimate insurance reserves on an ongoing basis. As we discussed in our second quarter call, general liability claims have been more volatile in recent years. Since the pandemic, the development of claims has worsened. The charge taken this quarter intends to capture this new environment. To address this over the long term, we have upgraded our risk management capabilities and revised our processes to focus on claim closures, among other areas. As we continue to address all open claims with our new processes, our actuarial studies should reflect more normalized risk exposure over time. Now back to our business segment results. Dollar Tree's net sales increased by 16% to $5 billion. Adjusted operating income increased 21% to $873 million. Adjusted operating margin increased 80 basis points, driven by a 230 basis point increase in gross margin, partially offset by a 150 basis point increase in adjusted SG&A rate. Gross margin improved primarily from lower domestic and import freight costs and favorable occupancy cost leverage due to the 53rd week. These were partially offset by mix pressures from lower-margin consumables, cost inflation, higher distribution and merchandise costs, and elevated shrink. Adjusted SG&A expenses expanded principally from the unfavorable general liability insurance claims and higher payroll expenses, depreciation, amortization, and repairs and maintenance. Family Dollar's net sales increased by 7% to $3.7 billion. Adjusted operating income was $7.2 million compared to $1.4 million, and adjusted operating margin increased 20 basis points on a 160 basis point increase in adjusted gross margin, offset by a 140 basis point increase in adjusted SG&A rate. Adjusted gross margin increased primarily from lower freight, mark-on increases resulting from vendor allowances, lower occupancy and distribution costs, partially offset by higher shrink and sales mix. Adjusted SG&A expenses increased primarily from unfavorable general liability claims, store labor investments, repairs and maintenance, and depreciation. Moving on to the balance sheet and free cash flow. Inventory decreased by 6.2%, reflecting a decrease of $337 million. Relative to last year, our sell-through of seasonal merchandise was strong. In addition, we had more capitalized freight costs and inventory last year. Fourth quarter capital expenditures were $784 million versus $328 million, reflecting the record 219 new stores we opened in the quarter, and elevated investments in other renovations, supply chain and IT to support our growth initiatives. Free cash flow declined by $82 million versus the fourth quarter last year, reflecting higher levels of capital expenditures at year-end. For fiscal 2023, free cash flow improved by $217 million versus the same period last year led largely by lower merchandise inventories and the timing of accounts payable with a partial offset from lower net income adjusted for noncash items and increased CapEx. This improvement for the full year comes despite a challenging macro environment and significantly higher levels of investments to support our multiyear growth strategy. Given the portfolio review process, we did not repurchase any shares in the open market during Q4. For the year, we repurchased 3.9 million shares for $504 million, including applicable excise tax. At the end of fiscal 2023, we had $1.35 billion remaining under our share repurchase authorization. Cash and cash equivalents totaled $685 million compared to $643 million. At year-end, our leverage as defined under our revolving credit agreement, stood at approximately 2.4x. Before I move on to our fiscal '24 and Q1 outlook, I'd like to take a moment to level set our 2023 performance to give you some deeper perspective on the foundation upon which our 2024 outlook is built. We think the best way to look at fiscal '23 is to start with our non-GAAP adjusted full year EPS of $5.89. As I mentioned earlier, this adds back all the costs associated with the portfolio review, the goodwill and trade name impairments, and the West Memphis resolution. On top of that, we got about $0.29 related to costs we called out in quarters 2, 3 and 4, including the insurance true ups, the OTC recall and other discrete items. Finally, the 53rd week this year added an extra $0.35 of EPS. Taking all that into consideration gets you to approximately $5.83 of EPS coming from the underlying operating performance of the business in 2023 on a 52-week basis. So with this $5.83 as a 2023 starting point, I'd like to discuss a few items that we expect to affect the actual operating performance of the business in 2024. First, lower ground and ocean freight costs benefited our full year 2023 EPS by approximately $1.50, which was nicely ahead of our original expectations. On the other side of the ledger, shrink and mix hurt EPS by approximately $1.15 on a full year basis, which is also more than we originally expected. Said another way, the 2023 shrink and mix headwinds offset about 3/4 of the benefit we received from lower freight costs last year. The good news is that, based on current rates, we expect to realize additional freight savings in FY '24. The bad news is that the base level of shrink and mix headwinds is meaningfully worse than we had previously expected. We anticipate these headwinds to be concentrated in the first half of 2024 and then moderate longer term as the macro environment normalizes and our self-help initiatives start to yield results. In light of these factors and to address the immediate macroeconomic environment, in 2024, we will be optimizing our SG&A and capital expenditure investments to support our growth initiatives. So with that, let's move on to our full year and Q1 outlook. Consolidated net sales for fiscal 2024 are expected to be in the range of $31 billion to $32 billion. For the full year, we expect low to mid-single-digit comparable net sales growth for the enterprise, low single-digit growth for the Family Dollar segment, and mid-single-digit growth for the Dollar Tree segment. Adjusting for the stores that are closing as part of the portfolio optimization, we expect fiscal year '24 net sales for the Family Dollar segment to decline by 1% to 3% on a year-over-year basis. Diluted EPS for the full year is expected to be in the range of $6.70 to $7.30. For Q1, we expect net sales to be in the range of $7.6 billion to $7.9 billion based on comparable net sales growth in the low to mid-single digits for both the enterprise and Dollar Tree segment, and approximately flat for the Family Dollar segment. Diluted EPS for the first quarter is expected to be in the range of $1.33 to $1.48. Our outlook for Q1 and fiscal '24 does not include any severance or other incremental costs related to the portfolio review process. Having given you our high-level expectations, let me share some of the key factors and assumptions that are incorporated in our fiscal '24 outlook. We expect full year gross margin in the Dollar Tree segment will be in the range of 36% to 36.5%, reflecting our strong comp outlook for the year and reduced freight expenses. In the Family Dollar segment, we expect full year gross margin will be in the range of 24.5% to 25% as elevated shrink, unfavorable mix and reduced SNAP benefits remain headwinds through at least the first half of the year. We expect lower freight costs to provide approximately $0.80 to $0.90 of full year EPS benefit in fiscal '24. This is a bit below the $1 benefit we've discussed previously and reflects the current conditions in the global shipping market, including lower water levels in the Panama Canal and the Red Sea situation. We expect approximately 60% of the freight savings to come in the first half of the year, with Q1 seeing the greatest benefit before it moderates in each subsequent quarter. Our fiscal '24 outlook also assumes approximately $0.30 to $0.35 of EPS headwinds from unfavorable mix and elevated shrink. Nearly all of these headwinds will be absorbed in the first half of the year as we annualize our 2023 exit rate on these items, with approximately 2/3 of the impact coming in Q1 and the balance in Q2. While we don't expect to get meaningful relief from shrink and mix pressures in the back half of the year, we expect the year-over-year impact to be more or less neutral in the back half. We expect full year SG&A expenses as a percent of total revenue will be approximately 25%. Our fiscal '24 SG&A outlook for the Dollar Tree segment reflects the incremental onetime reconfiguration costs that we expect to absorb at each of the 3,000 stores we are scheduled for conversion into our expanded and fully integrated multi-price format this year. Within our overall SG&A expenses, we expect full year corporate, support and other expenses will be in the range of 1.8% to 1.9% of total revenue. The Family Dollar store closures are expected to be approximately $0.15 accretive to EPS, mostly in the second half of the year as we close these stores throughout the first half. Adjusting for the timing impacts of all of these items, we believe approximately 38% of our full year EPS will be achieved in the first half of the year, with the remaining 62% coming in the back half. From a seasonality perspective, fourth quarter is historically our strongest earnings quarter. And finally, here are a few other modeling items to consider. Full year depreciation should be approximately $1 billion, which is approximately $0.55 higher year-over-year on an EPS basis, reflecting the additional depreciation and amortization associated with the $2.1 billion of CapEx spent in fiscal '23. We expect net interest expense of approximately $95 million for the year and $26 million for Q1. Our effective tax rate should be approximately 24% for both Q1 and the year. We expect capital expenditures for the year to be in the range of $2.1 billion to $2.3 billion. Finally, our outlook assumes no share repurchases, but we do have $1.35 billion of capacity under our remaining authorization. And with that, I'll turn the call back over to Rick.
Richard Dreiling:
There was certainly a number of moving parts last quarter. As a result, our reported earnings included a few unexpected items. That said, if you peel away the layers, we produced some very good operating results in a very challenging macro environment.
Considering what we accomplished, while continuing to execute upon multiple strategic initiatives, we have much to be proud of. And as I discussed earlier, we are continuing to invest in our risk mitigation, food and product safety and compliance programs in order to keep building on the foundation of service that defines this company. Looking forward, the Dollar Tree segment led by multi-price is exceeding expectations and gaining momentum. In the Family Dollar segment, we are taking the steps, as I outlined earlier, to fortify our base, strengthen our brand and position Family Dollar to achieve its full potential. I couldn't be prouder of our organization and our 200,000 associates across Dollar Tree and Family Dollar for their continued contribution to our success. I am truly honored to lead and to be part of the best team in retail. Operator, with that, Jeff and I are ready to take questions.
Operator:
[Operator Instructions] Our first question today is coming from Edward Kelly from Wells Fargo.
Edward Kelly:
So I wanted to start -- maybe, Rick, just take a step back and talk about how the company or how you are thinking about the company's outlook and the confidence in the strategy around the individual businesses are evolving. So you take your core Dollar Tree segment, the rollout of multi-price point seems to be going very well. How is your view on the opportunity there changing?
And then Family Dollar, obviously, not where it needs to be. What does that say? I'm sure you're not going to throw good money at the bad here. And then as part of all of that, is $10 still in play, maybe you just get there differently? Just thoughts on how things are evolving for you would be, I think, helpful.
Richard Dreiling:
Yes. Great question. And hey, I'd like to throw on the table, Jeff and I talked a little longer than normal. And for those of you that are interested, we'll go past the 9:00 straight up, and give you a little more time for questions.
As I think about, Ed, there is a -- this is a sum-of-the-parts story at the end of the day. And what's important here is we're very intently focused on creating shareholder value. The Dollar Tree multi-price point strategy is doing significantly better than we thought it would do. The customer acceptance has been off the charts to be frank. Our biggest problem right now is getting enough merchandise into the stores fast enough so the consumer can respond. Family Dollar is a victim of the macro environment out there. If you think about the increase in shrink, which I thought would have moderated, if anything, by now, but it's continuing to accelerate. And then the pressure on the mix. But again, I come back to a well-run Family Dollar is a very, very powerful retail format. And I think what we're doing is making the right decisions to fortify the base in Family Dollar and position it so we can go forward in a more stronger position. Now, in regards to the $10, we continue to believe in the $10 target that we announced, well, I guess, about a year ago, and we're continuing to march toward that goal. However, the macro environment has gotten in our way and we are dealing with high, high shrink numbers. We're dealing with big mix shifts. So it's a little difficult for us to pinpoint that $10 target going forward. We still believe in the target, but we believe the path is to get to $7 in 2024, and we're intently focused on that. But again, we want a positive 2024. And then as we move through '24 and '25, we'll give you more of a handle on the $10.
Operator:
Our next question is coming from Simeon Gutman from Morgan Stanley.
Uriel Zachary Abraham:
This is Zach on for Simeon Gutman. Can you provide any additional color on how you're thinking about the comp outlook in '24? Specifically, what are your assumptions for the progression of ticket and traffic throughout the year?
Richard Dreiling:
Yes. I mean obviously, our guidance -- we're looking for a strong year, particularly on the Dollar Tree side. And I think as we get into quarter 4, that is our big time of the year in terms of discretionary in Dollar Tree. We believe the initiatives that we're putting in place in Dollar Tree are definitely delivering very positive comp.
Family Dollar, as Jeff called out, is going to be a little tougher. And it's driven by the mix shift and it's also driven by, quite honestly, the pressure on the low-end consumer in terms of income and the SNAP benefits. We will cycle through the SNAP benefits as we move towards the end of the year, but we feel very comfortable with our comp outlook.
Operator:
Your next question is coming from Matthew Boss from JPMorgan.
Matthew Boss:
So two questions. Maybe, could you elaborate on the traffic trends and market share by demographic that you're seeing at the Dollar Tree banner? And just any change in underlying momentum at Dollar Tree quarter to date?
And then in light of the portfolio optimization, just your confidence in the go-forward Family Dollar fleet or maybe if you could share some performance across the curve in terms of the store base. And just lastly, potential opportunity to accelerate unit growth at Dollar Tree as you see it, just given the performance.
Richard Dreiling:
Yes. Dollar Tree, the fastest-growing demographic is north of $125,000 a year in income, which brings a lot more firepower to the store, to be honest with you. And I think, quite honestly, I think that attraction is the multi-price point, and the fact that we've been able to increase the variety of product in the store. And I think the interesting thing about Dollar Tree, the lift is pretty universal across all the operating markets. It's not like the Northeast is strong and the West is weak, it's where -- that boat is lifting pretty even all the way up.
When I look at the potential for Family Dollar and the optimization, again, it's a sum-of-the-parts story. And there are many opportunities in Family Dollar to maximize shareholder value. And what we intend to do, we know how well Dollar Tree is performing. As we said on our call, we're going to shift our focus to opening more Dollar Trees than we historically have done in the past. And quite frankly, it's been driven by the work on the coolers, and it's being driven by the multi-price point, that's made the box more viable. But I think the rationalization of the portfolio was a natural step. And now what we could do by eliminating a bunch of underperforming stores, which take the bulk of the district managers' time, we can now focus them on the stores that are doing better.
Jeffrey Davis:
If I may add just one additional point. If you think about the Family Dollar segment, one of the things that we're really proud of is that we continue to take market share across units, dollars, traffic. So what we're doing there within this banner is working for us. We have found that we are under a little more pressure with our particular higher penetration in lower income customer segment. But we believe the other merchandising and operating actions that we're taking will allow us to further unlock the value of this remaining portfolio of stores that we have within the Family Dollar brand.
Operator:
Your next question is coming from Chuck Grom from Gordon Haskett.
Charles Grom:
Just a couple for me. Jeff, can you unpack the margin guide by banner? I'm just trying to isolate if you're still anticipating another year of a loss at Family Dollar.
And then Rick, just bigger picture, when you look -- with input prices dropping, can you talk about how your merchants are adding more value, particularly at the Dollar Tree and particularly at that $1.25 price point?
Richard Dreiling:
Can you take the first one?
Jeffrey Davis:
Yes. So on Dollar Tree, for example, on the margin, we're guiding to 36% to 36.5%. That's a combination of a couple of things. One, as we continue to roll out the multi-price offering, that is going to place a little bit of pressure on us from a margin rate perspective, but you're really going to like the dollars that's going to be driving with units.
We do anticipate -- we had mentioned that we're anticipating about another $0.80 to $0.90 of freight that's going to be more heavily realized on the Dollar Tree side. And as I've mentioned, we'll expect to see about 60% of that in the first half of the year. So the margin on the Dollar Tree side is going to be sort of led by additional freight and then offset partially as a result of the roll out of the 3,000 stores and multi-price and further penetration in some of the other stores. But all in all, a very healthy 36% to 36.5% gross margin. And listen, Dollar Tree also is not immune to some of the issues we're having with shrink as well as the overall mix impact across the business. A little more profound when you get to the Family Dollar side of the business, while they will have a modest impact on the freight because we do import there also, but the impact there is really on the shrink and mix, offset by or actually lifted by further penetration of our private label product as well as our opportunity within OTC and HBA, which are normally higher margin opportunities for us.
Richard Dreiling:
And the only thing I'd add to that, Chuck, especially on the Dollar Tree side. When input cost goes down, the fact that we have fixed price points allows the Dollar Tree team to reengineer the product and bring a greater value to the table. And that's how that franchise has been built over the years. And so it's $1.25, it might stay $1.25, but it brings more value to the table, to the consumer.
Operator:
Our next question today is coming from John Heinbockel from Guggenheim Partners.
John Heinbockel:
I wanted to focus on the multi-price point journey, right? So going from 3 doors to 8, how do you think you'll attack that, right, 3 to 8 all at once in certain stores or staggered? How long do you think it will take to kind of replanogram Plus, the old Plus, right, into the categories? And then do you have a view -- like multi-price point penetration, when do we get to 10%? That seems like a fair mile marker.
Richard Dreiling:
Yes. Great questions. First thing I'll say to you, John, is we will stagger the rollout. I like to spread an initiative over time. That way, it turns into a gift that keeps on giving. So that's kind of our first plan on that.
The penetration, I would say right now, if Rick McNeely was in the room, the demand is insatiable from the customer. I like the 10% number that you threw out. We're going to be -- we were 8.8% in quarter 4. So yes. I think it is -- right now of all of the things we're doing, and I got Jeff shaking his head, I would call it the gift that keeps on giving right now. And we're just really pleased with it.
Jeffrey Davis:
And then I believe that the last part of the question, if I'm hearing it correctly, is about the timing of doing the replanograming, if you will, of the Plus section. First of all, we don't planogram. So that's an easier part to look at this. But as we think about doing some reconfiguration of the store to bring in the multi-price in line with other products, we're starting to do that this year, and that's the 3,000 stores that we expect to deliver this year.
Richard Dreiling:
And our goal, John, is get the multi-price point in the aisle where it belongs rather than being in the center of the store. We think it's more shoppable and the consumer will trade up.
Operator:
Our next question today is coming from Michael Montani from Evercore ISI.
Michael Montani:
Just wanted to ask, first off, two questions related to the store closures. I guess, number one, is there additional opportunity that we should be thinking about here in terms of rebannering in addition to the closures? And then number two, I wanted to see your thoughts around the potential to recapture some of that $700 million of revenue, given the proximity to the other stores.
Richard Dreiling:
Two great questions. As far as rebannering, we've already looked at a modest number of stores that we intend to do that in. And as we move through the portfolio, we will continue to research that.
The one thing we want to be very careful of is, number one, the proximity to another Dollar Tree. And number two, we want to be careful that we don't distort the Dollar Tree brand. So it's a little more complicated than just standing up saying, change them all to Dollar Trees and move forward. But it's a very good question that we're actually looking at as we speak. And what was the second part of the question?
Michael Montani:
Recapturing sales.
Richard Dreiling:
Yes, recapturing the sales. I think we feel pretty bullish about that. A lot of these stores that were rationalizing out of the system were built on top of another store. And there is the opportunity for us to take back some cannibalization. And I think it's a matter of time. And of course, we're going to continue to build new stores next year.
Operator:
Our next question is coming from Kate McShane from Goldman Sachs.
Katharine McShane:
I wondered if we could ask about the supply chain, the changes that you've been making, and how it's impacted inventory levels and turns.
Richard Dreiling:
I mean, I'll speak to half that question, and let Jeff do the hard part.
The fascinating thing -- depends on how many cases a store gets in an order to determine how many hours of savings there are. But I can tell you this, we've reduced our unload time to approximately 1 hour, which will benefit us long-term majorly, especially in terms of store standards, in stocks, which should lead to higher transactions, and the rest will be history having been through it. And in regards to inventory?
Jeffrey Davis:
Yes. So from a supply chain basis, one of the things we've been very focused on this past year is, not only in stock in the stores, but how we get in stock in the DCs. So working with our supplier partners to make sure that we're getting the merchandise at a timely basis according to the POs that we've placed. We've actually seen some good improvement in that area, which has benefited us ultimately in having our inventories in store at the time that we need to.
The fourth quarter is just an example of that, where last year, we had a little bit more supply chain disruption. The year before this year, we were able to have the merchandise in-country, in DC, in our stores, and that helped us with our overall sell-through, which ultimately helped us on our inventory levels at year-end because we were able to flow that through versus not having any inventory at the right time for the customer. But I believe, overall, the other actions that we're taking with respect to some of our systems to give us better visibility into where our inventories lie and where our needs are across the network will allow us to further improve on our in-stock positions.
Richard Dreiling:
And Kate, if I -- I'd like to call out, Mike Kindy, who's been with me for years, he's driving the supply chain now. And again, you raised a very good question.
Mike is working on 2 things:
the inbound service rate, which is getting the right inventory here at the right time; and then the outbound service rate, which is shipping what the stores are drawing. And we've had trouble with that, to be frank, over the years. But again, it's another example of improvements we're making.
Operator:
Our next question today is coming from Paul Lejuez from Citigroup.
Paul Lejuez:
Two questions. Just curious what's driving the average ticket lower at Dollar Tree, even as you add the higher price points? And how do you think about enrolling in those high-priced items, the eventual impact on the average ticket at Dollar Tree?
And then second, and sorry if I missed this, but what's the cash cost of closing the 600 stores of Family Dollar? And maybe if you can talk about the locations of those stores. Are they concentrated in certain geographies? Any common threads other than just not earning their cost of capital?
Richard Dreiling:
I'll let you manage the second part, which is the hard part. The -- what we're seeing is the reason our average ticket is down, I think it's because we're seeing more trips. People are coming more often. I think eventually, that will probably shake itself out, but it's all driven by the frequency of which the customer is coming in.
Jeffrey Davis:
Just to top that off also, what we've seen is that when a customer has a multi-price item in their basket, their basket many times is as much as 2x the average basket. So as it relates to the variety that we're asked that we're providing, it's definitely giving us a larger basket. But as Rick has said, the additional traffic, people are coming more often and their basket is just on average, lower.
As it relates to the stores that we're taking action on, from a geography standpoint, there's really no real concentration across the country. It's pretty much reflective of our overall fleet demographics, if you will, across the country. As it relates to the cash cost of closing these stores, on a cash basis, we'll actually be neutral to actually accretive in closing these stores. And it really comes from the fact that from a P&L perspective, you pick up the idea that you no longer have to carry the rents, but the stranded costs associated with the ongoing cost of running the dark store is going to be less than if you were operating the store. And net-net, you would actually pick up just a little bit of cash versus if we were running these stores and operating them under a loss position. Over time, that actually gets better as these stores start to run off whatever remaining portion of their lease. So the cash requirement is reduced pretty substantially over the next 3 years.
Operator:
Our next question today is coming from Peter Keith from Piper Sandler.
Peter Keith:
I wanted to dig into the SNAP headwind of negative 5% on Family Dollar. Could you quantify how you got to that math? Because if I'm doing the math myself, I look at about a 35% decline in SNAP for the quarter on about 7% to 8% of sales is about a 2.5% headwind overall.
Jeffrey Davis:
Yes. The way we're looking at this, once again, it depends on the -- your assumption on the penetration of our customer. But as we take a look at what that SNAP customer means for us and how we've been looking at the sort of contribution on a year-over-year basis, that's how we derive the 5%.
Operator:
Our next question is coming from Joe Feldman from Telsey Advisory Group.
Joseph Feldman:
I wanted to ask, what -- as you guys are looking at the Family Dollar stores that you're closing, I was just kind of curious, like what part of the transformation strategy work that you guys have done in the past year or so, I guess, do you feel won't work in those stores? Like, was there something that you just felt like -- I guess it's a lost cause, for lack of a better term? But maybe you could just share some thoughts around that where maybe like help the other stores that do continue to run and what works there that didn't work in these stores.
Richard Dreiling:
Yes. Another really good question. I would look at you and say the initiatives have worked in every store. The problem is the magnitude of the lift. And I think also as we looked at these stores, it was their location, the competitive environment, the quality of the facility, the proximity to the competition. There was many, many, many factors.
And we have had in the past a real estate strategy that wasn't really, really focused on maximizing value. And what we've done now is pick stores that we don't think have a long-term future, and more importantly, hopefully, we'll be able to transfer some sales from this closed store into one of our operating stores. So I mean, it's a pretty thorough process. And the important question is, why didn't they get the lift from the initiatives of the other stores that we're keeping, obviously, which is the bulk of the portfolio. It has to do merely with a lot of other extraneous factors.
Jeffrey Davis:
Yes. And just to add back, I think actually, Paul had a portion of his question I didn't answer that was on this very topic. Many of these stores were operating unfortunately at a level that the operating loss of these stores was pretty substantial. And even with the lift of some of the initiatives, while we're starting to mute the level of loss, we were still significantly below what we consider to have a reasonable return. Especially when we think about the additional investments that we would want to make in these stores as it relates to store standards, as it relates to just a number of other things, that it just wouldn't be able to carry a return on the additional investment for these stores.
A lot of this is driven by the fact that over time, rents shrink and a number of other exogenous sort of factors has driven the store to a point where, unfortunately, they're just operating at a very significant loss.
Operator:
Our next question is coming from Brad Thomas from KeyBanc Capital Markets.
Bradley Thomas:
Rick, I was hoping you could talk a little bit on the Family Dollar side about the consumables category. And I was hoping, you could talk a little bit about the competitive landscape, how you're feeling about pricing and some of the opportunities to drive share going forward?
Richard Dreiling:
Yes. On the consumables side and Family Dollar, as we have gotten our mix right inside the store in terms of the SKU count, remember, we discontinued 1,000 and added 2,000 for a net of 1,900 and change. We're very pleased with what we're seeing in terms of movement. We've made the consumable mix more relevant. And add to that, the emphasis that we have placed on private brands. And now you have a national brand equivalent item that the consumer can purchase. And I think our consumable mix, to be honest, is the best it's been in Family Dollar, hearkens back to my old days as a grocer.
In regards to pricing activity out there, the market continues to be relatively stable. I would even say, the promotional activity on the weekly flyers is relatively stable. It's not like we're seeing anything that's really wild. And I think our pricing position for Family Dollars is as good as it's ever been.
Operator:
Our next question is coming from Scot Ciccarelli from Truist Securities.
Joshua Young:
This is Josh Young on for Scott. Could you guys just clarify what are you going to do with the inventory at the stores slated for closure? So in other words, are there discounts which may boost sales and hurt margins? Or will inventory just be shifted to other stores? And is that all captured in your guidance?
Jeffrey Davis:
Yes. So first of all, it is captured in our guidance. And the way that we'll do this is, given the announcement of the timing of the store closure, we'll run a series of different discounts to help move through the inventory. Also, as part of the impairment that we've taken, we've also already accounted for an impairment of that value of inventory at some level in order to ultimately realize the sale.
Operator:
Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.
Richard Dreiling:
Thank you all very much for your time today, and looking forward to talking to you again in the near future.
Operator:
Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator:
Hello, and welcome to the Dollar Tree Third Quarter 2023 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the conference over to Bob LaFleur, Senior Vice President, Investor Relations. Go ahead, sir.
Robert LaFleur:
Good morning, and thank you for joining us today to discuss Dollar Tree's third quarter results. With me today are Dollar Tree's Chairman and CEO, Rick Dreiling; and CFO, Jeff Davis.
Before we begin, I would like to remind everyone that some of the remarks that we will make today about the company's expectations, plans and future prospects are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties, which could cause actual results to differ materially from those contemplated by our forward-looking statements. For information on the risks and uncertainties that could affect our actual results, please see the risk factors, business and Management's Discussion and Analysis of Financial Conditions and Results of Operations sections in our annual report on Form 10-K filed on March 10, 2023, our Form 10-Q for the most recently ended fiscal quarter, our most recent press release and Form 8-K and other filings with the SEC. We caution against reliance on any forward-looking statements made today, and we disclaim any obligation to update any forward-looking statements, except as required by law. Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided in today's earnings release, available on the IR section of our website. These non-GAAP measures are not intended to be a substitute for GAAP results. Unless otherwise stated, we will refer to our financial results on a GAAP basis. Additionally, unless otherwise stated, all comparisons discussed today are for the third quarter of fiscal 2023 and are against the same period a year ago. Please note that a supplemental slide deck outlining selected operating metrics is available on the IR section of our website. Following our prepared remarks, Rick and Jeff will take your questions. [Operator Instructions] And now, I'd like to turn the call over to Rick.
Richard Dreiling:
Thanks, Bob. I'd like to welcome everyone joining us on the call today. In brief, thanks to the dedication and hard work of our teams and continued execution towards our business transformation, third quarter results were well within our expected range.
In a challenging retail environment where the accumulating pressures of inflation, reduced government benefits and depleted savings have negatively affected lower-income consumers, our top line performance outpaced most of our peers. We accomplished this by taking market share in both segments, which we believe reflects the initial impact of our investments and transformation initiatives. Despite Family Dollar softer comps and $0.05 per share of unexpected costs from the previously announced voluntary recall of OTC and other products, we delivered $0.97 of EPS. Our sales momentum continues to be mostly traffic driven as we attract new customers and gain both unit and dollar market share. In the last 12 months, we have added 4.3 million new customers at Dollar Tree and 2.3 million new customers at Family Dollar. Importantly, most of these first-time customers come back to shop with us multiple times after their first visit. In fact, our loyal customers are now the third largest retail customer base in the United States. As importantly, Dollar Tree is attracting customers from a broader range of income levels. Most of our new customers over the past year have household incomes over $125,000, and this income demographic was a significant contributor to Dollar Tree's quarter 3 comp growth. At Family Dollar, our price value perception remains strong after last year's price investments, which we cycled in July. That said, Family Dollar fell short of our quarter 3 comp expectations. Similar to what other retailers have reported, we experienced softening trends throughout the quarter, particularly in October. As lower-income consumers responded to the accumulated impact of inflation and reduced government benefits, we saw a notable pullback in spending, particularly in higher-margin discretionary categories. I will now review some of our third quarter highlights. For the third quarter, consolidated basis, we delivered a 5.4% increase in our net sales to $7.3 billion. This was driven by comp growth of 3.9%, with traffic up 4.7% and average ticket down a little less than 1%. Operating income came in at $301.7 million, which resulted in EPS of $0.97, including the negative $0.05 impact from the OTC recall. In the Dollar Tree segment, our comp was up 5.4%, with traffic increasing by 7% and average ticket decreasing by 1.5%. We are especially pleased with these results as they come on top of an 8.6% comp last year. Our consumables comp was up 11.1%, and discretionary was up 1.1%. We believe the consumables strength at Dollar Tree this quarter as well as our strong multiyear discretionary comp shows customers are embracing our compelling value proposition in this strained economic environment. According to Nielsen, Dollar Tree gained an impressive [ 30 ] basis points of consumables market share in the third quarter as our unit volume grew 6%, while market unit volume declined. In the Family Dollar segment, our comp was up 2%, with traffic increasing 1.4% and average ticket increasing 0.7%. Our consumable comp was especially strong at 6.2%, while discretionary was down meaningfully at 12.5%, particularly in categories like home decor, electronics and toys. In our view, these trends underscore how lower-income households are under increasing financial stress and directing their spending towards needs-based goods. While traffic and ticket were both positive for the quarter, results did soften substantially as we moved through the quarter, with average ticket turning negative in October as our customers pulled back and we realized the adverse impact of the OTC recall. Even with these external challenges, Family Dollar grew market share in consumables, with both unit and dollar growth exceeding the market by wide margins. Although our low prices enable us to operate from a position of strength in consumables, our lower-income customers at Family Dollar have been especially pressured by reductions in government SNAP benefits. Nationwide, third quarter SNAP benefits were down 23% on a year-over-year basis, which was much more than the 5% reduction in quarter 1 or the 16% reduction in quarter 2. Timing-wise, the month-by-month deceleration in our quarter 3 comps matched the progressive reductions in national SNAP payments throughout the quarter. In addition to pressure from lower SNAP payments, Family Dollar's comps were negatively affected by lower tax refunds this year. That said, I believe that the wide range of growth initiatives we have in place will help us maintain our momentum relative to the competition. As a value retailer, we're uniquely positioned to meet customers' needs in a challenging economic environment. We remain focused on the factors that we can control, and we'll continue to navigate as best we can around those that we don't. Now let me take a few minutes to update you on our transformation journey. Our merchandising, IT and supply chain initiatives are on time and on budget, and we are pleased with our progress to date. At Dollar Tree, we're ahead of schedule on our multi-price journey. Our Dollar Tree Plus assortment is now available in 4,500 stores, and we are on track to finish the year with more than 4,900. Our Dollar Tree frozen and refrigerated assortments are now in 6,500 stores, significantly ahead of our original year-end target of 5,500. Customers are clearly responding to our expanded multi-price assortment as our research shows us that 17% of U.S. households have purchased a multi-price product from a Dollar Tree store at least once in the past 12 months. Importantly, these customers are adding multi-price products on top of their traditional baskets. For example, in quarter 3, the average multi-price basket included 2.3 multi-priced items and 11.6 traditional $1.25 items. At Family Dollar, we completed our planogram resets by November as scheduled, improving and expanding our product assortment while increasing our shelf profile and merchandising to [ 78 ] inches across the portfolio. We're on track to renovate more than 1,000 Family Dollar stores by year-end. We have now upgraded 1,600 Family Dollar stores to our H 2.5 rural and extra-small box formats. In quarter 3, private brand penetration at Family Dollar reached 14%, a quarter ahead of schedule, and we are on pace to hit our 20% target by 2026. We are also on track to add over 70 new SKUs to our Family Wellness product line and more than 100 new private brand SKUs in total by the end of December. Within that same time frame, we also expect to complete our conversion of 300 control brands to private brands. In real estate, we opened 197 new stores in quarter 3, and we are on track to meet our target of 600 to 650 new stores this year. In supply chain, we are preparing to implement our streamlined delivery process for stores serviced by our Matthews, North Carolina distribution center with roto carts and liftgate trailers starting next month. We have been testing our roto carts, and the feedback has been extremely positive. We remain on schedule for all of our distribution centers to be using roto carts by the end of 2027. Across our teams, the investments we've made in our people, including increased wages in key markets, simplified work at the store level and increased communications throughout the company, are driving meaningful improvements in store turnover and associate satisfaction. Additionally, as we prepared for our busiest season of the year, I'm proud to report that our annual National Hiring Day in mid-October was a huge success. We hired nearly 14,000 part-time associates to work in our stores for the current holiday season, an all-time record for this event. While we still have a lot of work to do in this transformational journey, I am pleased with what we've accomplished to date. We are focused on our plans to accelerate sales and grow earnings, and I remain confident in our ability to execute this ambitious undertaking. That said, this journey also needs to be dynamic and adapt to changing market conditions and our learnings along the way. We believe being thoughtful about our store portfolio will help enhance our results. To maximize value creation, we need to periodically reevaluate our portfolio in terms of current market conditions, individual store performance and overall portfolio considerations. To this end, we have initiated a comprehensive review of our Family Dollar portfolio to address underperforming stores that are not aligned with our transformative vision for the company. This will involve, among other things, identifying stores as candidates for closure, rebannering or relocation with the goal of ensuring that each assets under the Family Dollar banner is delivering its full value for our shareholders on a sustainable basis. I am a strong believer in the Family Dollar brand and what it means to our customers and associates in thousands of communities across the country. Going forward, we need to ensure that the Family Dollar portfolio is well positioned for success and meets the financial and operating objectives of our organization and the expectations of our valued customers and associates. We believe that this action will fortify our base, strengthen our brand and allow Family Dollar to achieve its full growth potential. Jeff will now review our financial results and outlook for the remainder of the year.
Jeffrey Davis:
Thank you, Rick, and good morning, everyone. In the third quarter, our Dollar Tree and Family Dollar segments, both generated higher levels of customer traffic, unit volume and increased market share. Overall, we generated 5% more gross profit dollars in the third quarter than we did last year as consumers continue to respond positively to our growth initiatives.
Consistent with prior-quarter trends, sales mix continued to shift towards consumables. This trend was more pronounced at Family Dollar, where our third quarter consumables mix reached an all-time high of 82%. Looking at the business on a consolidated basis, net sales increased 5.4% to $7.3 billion. Operating income declined 20.9% to $301.7 million. Operating margin compressed 140 basis points, which was a substantial trend improvement versus the first 2 quarters of the year. The contraction in Q3 operating margin was driven by a 15 basis point decrease in gross margin and a 125 basis point increase in SG&A rate. Gross margin contracted primarily from higher shrink, unfavorable product mix, increased distribution costs and markdowns from the OTC recall. This was partially offset by lower freight costs. While still elevated across both banners, shrink results were mostly in line with our expectations. We have now completed physical inventory checks across more than 90% of our stores, with a balance set for completion in January. SG&A expenses expanded primarily from ongoing labor investments in our stores, IT costs, depreciation and facility costs. Our effective tax rate was 21.8% versus 23.4%. Our tax rate was favorable versus expectations as higher work opportunity tax credits and lower net state taxes were partially offset by higher nondeductible expenses. Net income was $212 million, and diluted EPS was $0.97 versus $1.20. The net impact of the OTC recall was approximately $0.05 per share. At the business segment level, Dollar Tree's net sales increased by 6.6% to $4 billion. Operating income declined 3.4% to $482.7 million. And operating margin compressed approximately 125 basis points, driven by a 55 basis point decrease in gross margin and a 70 basis point increase in SG&A rate. Gross margin contracted primarily from higher product costs, distribution center costs and shrink. These were partially offset by lower freight and sales leverage and occupancy cost. SG&A expenses expanded principally from store labor investments, minimum wage increases and facility costs. These were partially offset by sales leverage. Family Dollar's net sales increased by 3.9% to $3.3 billion. Operating income declined $47.9 million to a loss of $66.3 million. Operating margin compressed 140 basis points on a 20 basis point increase in gross margin and a 160 basis point increase in SG&A rate. Gross margin increased primarily from lower freight, partially offset by higher shrink, markdowns related to the OTC recall and sales mix. SG&A expenses increased primarily from labor investments, minimum wage increases, facility costs, costs related to the OTC recall and depreciation. Moving on to the balance sheet and free cash flow. As a reminder, my comments reflect balance sheet comparisons between Q3 2023 and Q3 2022. Inventory decreased by 2.5%. As we work through our shipments of seasonal imports, we expect a meaningful improvement in our inventory position by year-end. Third quarter capital expenditures were $541.4 million versus $391.2 million, reflecting elevated investments in new store openings, renovations, supply chain and IT. Free cash flow improved $142.1 million versus the third quarter last year. This improvement comes despite a challenging macro environment and the accelerated investments to support our multiyear growth strategy. For the 9 months of 2023, free cash flow improved $299.1 million versus the same period last year, led largely by lower merchandise inventories, with a partial offset from lower net income adjusted for noncash items, increased CapEx and the timing of accounts payable. In the third quarter, we repurchased approximately 2.2 million shares for $252.3 million, including applicable excise tax. At quarter end, we had $1.35 billion remaining under our share repurchase authorization. Cash and cash equivalents totaled $444.6 million compared to $439 million. You'll recall last quarter, we announced our new commercial paper program as an additional source of liquidity to manage our working capital needs. At quarter end, we had $230 million outstanding under this program. During the third quarter, we also implemented a new supply chain finance program. Participation in this program is voluntary for our suppliers and provides them with additional flexibility to finance payments due from Dollar Tree. This process will be managed by a third-party financial institution. At quarter end, our leverage, as defined under our revolving credit agreement, was 2.53x. Now let me provide some perspective into our sales and EPS expectations for the fourth quarter and its impact on our full-year outlook.
Our outlook takes into consideration the following factors and expectations:
Consistent with our prior expectations and the patterns we have seen throughout the year, we expect shrink trends will remain unfavorable in the fourth quarter. Family Dollar comps are expected to remain soft, reflecting the unfavorable macro environment for low-income households, continued discretionary weakness and elevated promotional activity in the market.
On the plus side, we expect continued strength at the Dollar Tree banner as consumers embrace our compelling value proposition and multi-price strategy in addition to incremental freight savings. With that background, we expect net sales for the fourth quarter will be in the range of $8.6 billion to $8.8 billion, based on low single-digit increase in comp store sales for the enterprise, supported by a mid-single-digit increase at Dollar Tree and a minus 1% to plus 1% comp at Family Dollar. As a reminder, last year's Family Dollar comp accelerated meaningfully throughout the year, most notably in the back half as we began our price and labor investments and launched our transformation initiatives. Our Family Dollar comp results for Q3 and outlook for Q4 reflect these tougher comparisons. We estimate fourth quarter diluted EPS will be in the range of $2.58 to $2.78. For the fiscal year, which includes a 53rd week, we expect sales in the range of $30.5 billion to $30.7 billion, driven by a mid-single-digit increase in comp store sales at the enterprise level, supported by a mid-single-digit comp at Dollar Tree and a low single-digit comp at Family Dollar. With respect to EPS, we believe that higher sales at Dollar Tree, incremental savings and freight and proactive expense controls will allow us to offset lower revenue expectations at Family Dollar. We are tightening our full-year GAAP EPS outlook to a range of $5.81 to $6.01, including the $0.12 legal reserve we took in the first quarter. We still expect selling square footage to grow by 3% to 3.5% for the year and new store growth to be back-end weighted.
Other considerations in our 2023 outlook include the following:
No incremental share repurchases. Depreciation and amortization should be in the range of $840 million to $845 million. Net interest expense should be approximately $30 million for the fourth quarter or approximately $110 million for the full year. We are assuming an effective tax rate of approximately 24% for the fourth quarter and approximately 23.5% for the full year.
We expect 218.4 million diluted shares for the fourth quarter and 220 million diluted shares for the full year. We expect capital expenditures will total approximately $2 billion, with approximately 40% allocated towards maintenance CapEx and the balance toward growth initiatives. Finally, our Q4 and full-year outlook does not include any potential impact from the optimization review of the Family Dollar portfolio that Rick outlined in his remarks. We expect the review process will take several months, and we will update you on our progress no later than our Q4 call in March. Now, I'll turn the call back over to Rick for closing remarks.
Richard Dreiling:
Thank you, Jeff. Similar to other retailers you've heard from this earnings season, we are seeing more macro pressures than we did earlier in the year, particularly among our lower-income consumers. Nonetheless, I'm encouraged by our market share momentum and am confident in our outlook for the balance of the year.
Across our enterprise, we are making good progress on our transformation initiatives. As I've said before, we benchmark our operating performance on growing traffic, units and sales per square foot. All three of these metrics are heading in the right direction. With the steps we're taking to optimize our Family Dollar portfolio, we want to be better positioned to meet the financial and operating objectives of our organization and the expectations of our valued customers and associates. Relative to our competition, we want to operate from a position of strength at both banners. I look forward to updating you on our continued progress in the months ahead. And since we're in the midst of the important holiday season, I also want to take this opportunity to thank our more than 200,000 associates for their dedication in support of our continued growth as an organization. Operator, with that, Jeff and I are now ready to take questions.
Operator:
[Operator Instructions] Our first question is coming from Michael Lasser from UBS.
Michael Lasser:
It's a two-part question. Number one is, given the economic environment that you're facing, seems to be different than what you expected when you offered your long-term guidance earlier this year, how does that influence your thinking about your ability to achieve $10 of earnings by 2026 if the economic environment that is current to date remains the case for the next few years?
And the second point is -- my second question is there's a perception that you're going to earn, call it, around $6 this year. You get $1 of freight benefit next year. And that would generate $7 of earnings. What would stand in the way of you not realizing that?
Richard Dreiling:
I'm going to let Jeff handle that.
Jeffrey Davis:
I appreciate your question. The first part of your question regarding the longer-term outlook, the economic environment that we're in today, we believe that we're managing through. You see the Dollar Tree and Family Dollar continue to take market share, they're doing well across consumables.
We believe that many of the actions that we're still sort of developing and will be put into action as we go through the fourth quarter into next year will help improve our top line, especially with a customer who is looking for additional value opportunities. This is -- we're early in the transformation. We believe that the actions we're taking that we feel strongly will continue to move us forward to our longer-term outlook. There's a lot that's going to happen between now and 2026, and there really isn't a real crystal ball there, but we remain resolute in our outlook. As it relates to 2024, I think that the way you're thinking about this from a standpoint on a sort of pro forma no growth, no incremental basis, yes, $7 of EPS when you take all the puts and takes between our forecast for this year. Remember, you've got to back up the 53rd week, which is about $0.30 in that. But we feel that that's a good starting point as you think about our 2024 outlook. We remain very confident in our ability to pick up the additional dollar in freight and EPS. There may be some additional upside to that, based upon what we're currently trending. And the actions that we're taking and the returns that we believe we will get from the initiatives that we've started this year will continue to develop as we move forward, that's a good starting point for you.
Richard Dreiling:
And Michael, let me add a little more thoughts on getting the 2026 number. We remain very bullish on that. And I think as we look into 2024, what's important is the number of initiatives that we've gotten done in just 1 year are really starting to gain traction. .
And let's not lose sight of the fact why the fact that discretionary sales are softer than we all want our consumable sales are excellent, and we're responding to the needs of the consumer. And when we have the items they want, they're going to come into the store and see the incremental items, the incremental price points on the Dollar Tree side. They're going to see the new shelf profile, and they're going to see the fact that we're more relevant. And that's what gives me great confidence as we look into '24 and beyond.
Operator:
Our next question today is coming from Simeon Gutman from Morgan Stanley.
Simeon Gutman:
It's a little follow-up to the prior question and then maybe a slight second part. If we take again the $1 in freight, should we think about next year, again, without talking about real guidance, the core business should grow plus we get freight? Or you're not endorsing that the core business necessarily grows as we get freight for sure?
And then just the second part of it is on Family Dollar, can you remind us if the crux of generating higher margins to sales productivity, then what's going to be the step-change? And when should that occur?
Jeffrey Davis:
Want to take the first part?
Richard Dreiling:
You take the freight, and I'll take the second one.
Jeffrey Davis:
Very good. I think, and the way I was trying to respond to Michael's point from a standpoint of what's the starting point for FY '24 as he was kind of putting together the components, if you assume once again -- I think the view is looking at -- assuming a no growth, no incremental investment year, you would be starting off with a point that would be roughly $6.80 to $7 of EPS, assuming where we believe we'll end this year plus the additional dollar of freight and then once again, the other puts and takes around the 53rd week, which comes off as well as some of those discrete items we had this year as it relates to West Memphis, OTC and general liability.
But we believe that we will have the opportunity to grow our business from there. We're not giving guidance for 2024 as of yet. But I think that people are focused on the right components that get you to a starting point and then what your assumptions are based upon how you think our initiatives will continue to take hold and grow from there.
Richard Dreiling:
And then in regards to Family Dollar and when we should start to see the incremental margin, I think as I reflect on where we're at right now, you think about the incremental SKUs, of which the bulk are OTC and HBA, which all carry higher margin rates, now they tend to be a little more discretionary. .
You think about the fact that now private label -- we've already reached our 14%, which carries massive incremental margin. All of that stuff is going to be in place as we roll into 2024, which, again, gives me a lot of comfort on how Family Dollar is going to perform next year. There's no doubt there's pressure on that consumer. But I've always said the lower-income consumer has the ability to figure it out. And we are offering a better value proposition in Family Dollar than it has ever had. I'm very, very comfortable with the way the box looks, the way it's presented and how the consumer is responding. And I would add that when we entered quarter 3, the first period of the quarter, our comps were very good in Family Dollar, and we watched them [ erode ] through the period -- through the quarter. So again, we entered it from a very strong position.
Operator:
Next question is coming from Paul Lejuez from Citi.
Paul Lejuez:
Can you talk about your Family Dollar comp assumption 4Q, just how you're thinking about how it breaks down from a traffic versus ticket perspective?
And then within ticket, AUR versus [ BT ]? I'm curious if you can make any comments about your inflation assumptions for 4Q and FY '24?
Jeffrey Davis:
Paul, I guess the way we think about it, we really -- the balance of the comp has really been between ticket and traffic. It's been pretty consistent in its makeup. It's been around 50-50. What we've seen here more recently is ticket has dropped off as that customer has been a little more challenged.
We're continuing to see that going into the fourth quarter, thus our guidance of down 1% to plus 1%. We're not prepared to start getting into AUR and other further -- [ by-section ] of it. But as we think about traffic and ticket, it's going to -- we think we're going to have traffic probably driving more of the comp, offset by some ticket pressure.
Richard Dreiling:
And Paul, I'd like to add to that, that I -- we look -- we are intently focused on three key metrics
Operator:
Your next question is coming from Edward Kelly from Wells Fargo.
Edward Kelly:
I wanted to ask you, I guess, a two-part question around Dollar Tree -- the core Dollar Tree business. You continue to roll out new price points. Maybe just an update on where you think the evolution of that is going over time? And how we should think about the timing of rollout of those price points?
And then, that concept generally, it does like it's developing into a very formidable traditional dollar store competitor. I'm curious as to where you think you're gaining the share from? Is there any impact in Family Dollar, given what is happening there? And how is the evolution of the concept impacting the way you think about growth, both number of units and where those units may go?
Richard Dreiling:
Great question. Let's start with the price points. We have Rick McNeely and his team have done an outstanding job of introducing new price points. And you have to remember, Ed, we have to buy these things almost a year in advance in order to get them into the stores. And we're starting to see them arrive. We've actually done a test on Halloween and a number of stores with multi-price candy, and we're really, really excited with what happened with that.
Now, it's really important that -- and I've said this frequently, I don't want anyone to think there's going to be 100 different price points in that store. We're going to -- our core price point is still $1.25. And what we're working on, what is the right amount and right number of price points. And what I can tell you is the consumer is -- it is -- when we broke the $1.25 a year ago, I have to tell you that, that barrier was broken, and now the consumer is very receptive to what's going on. And when we added an incremental price point, Rick and his team were not adding $1.25 item that's a little bit bigger or a little different at $2. We're adding a different item that has even more value. So there's no SKU overlap, which makes us a little more harder to get executed. Now we've already done the work. I know what it's going to take to get items into the store, get them marked, priced properly. 40% of our SKUs are coming from overseas, and they're going to add the price point right on the product. So a lot of great work has been done. And I think that's some of what we're seeing is the -- with the multi pricing, we've been able to make the brand more relevant to more people. And I know it's hard, but the consumable side and the way the team reacted to that, I think, has also proved positive that we're attracting a different customer segment. Now in regards to future store growth, we are weighing right now, what is the proper mix between Family Dollar and Dollar Tree. Obviously, the Dollar Trees become very profitable very fast, and it appears that we've broadened the demographic appeal of that brand. And I've said this, a well-run Dollar Tree is a pretty powerful retail format. And it's a format that a lot of people would shop in. And the fact that we're getting our arms on the price points, the fact that we're getting our arms around our store standards is putting us in a position where that brand might be -- we might be able to go to different areas that we've historically stayed away from. In regards to is it affecting Family Dollar, I would look at you and say, those are two different customer segments. The first thing we did when we got together as a team is realized that the go-to-market strategies for both brands are totally different. One is the thrill of the treasure hunt in and out, if you run out, I should have bought more versus Family Dollar, which is traditional consumable retailing, where there's an expectation of what has to be in that store, and it's got to be there every time I come in to get it.
Jeffrey Davis:
And Ed, just to add, in the prepared comments, we had mentioned the fact that a lot of the growth that's happening in Dollar Tree is actually coming from that higher-income customer, where we're attracting 4.3 million new customers on a year-over-year basis. A lot of these customers are in that income demographic of $125,000 or greater, and we're capturing that basket.
Operator:
Next question today is coming from John Heinbockel from Guggenheim.
John Heinbockel:
Two quick things or -- maybe the first one is not as quick. But on your [ FTL ] review, can you talk philosophically, right, how you're going to attack that? Because on the one hand, you'd want to dedicate more resources to the stores that have the most potential, but you also don't want to cut back too far from a descaling or deleverage perspective. So maybe talk about that, the opportunity to convert all of those to Dollar Tree. Does that exist?
And then my small follow-up is just remind us when you think you'll get to eight cooler doors at $3 to $5 price point at Dollar Tree, is that 2 years out, a year out, 3 years out? When is that?
Richard Dreiling:
Well, let's go with the easy one. The Dollar Tree cooler doors, we should have done within the next couple of years.
Now the [ FTL ] review, we started off with all of our initiatives and the idea being that we get everything in place and see what stores respond and what don't. And what I do want on this exercise, John, is not everyone to get ahead of me because I do think this is a very healthy thing to do and it's a timely thing to do. There will be some stores that will relocate, maybe some stores will close, maybe some stores will rebanner. But I do not have any of that information at this stage of the game. I've always prided myself on being transparent, and all I'm trying to do is tell the world we're taking a look at it. And I do think it's prudent. And I do think -- I don't want anyone to misconstrue that I'm not totally behind Family Dollar because I am. And I don't want anyone to think that, that doesn't mean we're not going to grow Family Dollar because I'm not saying that at all. It's simply a matter of reallocating assets to where we think we can be more productive.
Operator:
Next question is coming from Matthew Boss from JPMorgan.
Matthew Boss:
So a couple of questions from my side. Maybe first, Rick, on mid-single-digit comps at the Dollar Tree banner, what do you think is the best breakdown beyond this year to think about between traffic and ticket? At Family Dollar, Rick, what was the comp in October? Have you seen any change in November?
And then, Jeff, could you just elaborate on what you've seen change in the promotional landscape?
Richard Dreiling:
Yes. I mean, let me -- let's start with the promotional landscape, and I'll take that, Jeff, if that's okay, and let you put the color around it. .
I think the promotional landscape, I have not seen anything irrational at this stage of the game. I would look at you and tell you that we are seeing discretionary items being promoted, which I think is more a reflex against people worried about the inventory they have on hand. I will tell you, Thanksgiving being an all-time grocer, historically, you get the right price on turkey, then you make your money on all the grocery items around it. We saw a lot of incredibly well-priced grocery items this year coming out of the big box and the grocery channel, which is a little contrary. And there has been elevated activity on [ CSD ], basically 12 packs. But other than that, there hasn't been a lot out there. And then on the first question?
Jeffrey Davis:
There was a question regarding the Family Dollar comps. The Family Dollar comps during the course of the quarter, they softened as we went through the quarter. We started off with a nice pace.
October was the most challenged month of the quarter. And you'll see that, that was across all retail. We were essentially flat in that particular month. And our guidance for Q4 was reflecting the fact that, that has continued to soften for us, and that's the guidance of down 1% to plus 1% for the entire quarter.
Richard Dreiling:
And the one thing I'd add to that, Matt, while we think -- we saw things soften in October, I'm knocking on wood here thank God, we had our initiatives in place because while it softened, it could have been a lot worse. And I'm very pleased how we got ourselves through that quarter.
Operator:
Next question is coming from Kate McShane from Goldman Sachs.
Katharine McShane:
We wanted to ask specifically about Dollar Tree. We know you noted that you saw a broader range of income shopping at Dollar Tree and it contributed to your Q3 comp growth at the higher end. We wondered with regards to the lower end, just what you're seeing specific to the Dollar Tree banner?
Richard Dreiling:
I would say -- I mean, I would look at you and say, Dollar Tree has always had a broad appeal. And I think what we're seeing, what we're focused on is the fact that we're seeing a trade down in the Dollar Tree. I would say, the customer base is essentially the same. There's been no erosion in the lower-income strata, but the growth, undoubtedly, is coming from the higher income, $125,000 a year.
Jeffrey Davis:
I reflect back on this, for Dollar Tree, had a very strong consumable performance but also better than a 1% comp in discretionary and still showing growth on a -- it's a sizable growth on a year-over-year basis in discretionary.
The lower-end customer -- lower-income customer, we're probably seeing more of their dollar in consumables, which is good because we're continuing to capture units and share there. The higher-income customers supporting us in that discretionary as well as in consumable areas with respect to the multi-price also. So it's a combination of both those customers as Thanksgiving has a strong performance across the Dollar Tree banner.
Operator:
Next question is coming from Krisztina Katai from Deutsche Bank.
Krisztina Katai:
So my question is on Family Dollar. Understandably, there was some weakness with the low-end consumer. But how are you planning to address the softer-than-planned top line at Family Dollar to get it back on track towards mid-single digits? That is a big part of the profitability inflection, so how do you think about your current pricing position relative to your peers?
And then the second part of that, I know you're not guiding to next year, but philosophically, how best to think about the ability of the banner to drive positive units to offset any potential deflation next year in consumables?
Richard Dreiling:
Yes. In regards to the top line, in regards to our pricing position, so first thing I would say, our pricing in Family Dollars as good as it's ever been. And we measure our pricing on a full book basis and what we call key value items. And key value items are the most sensitive items out there.
And we do these checks every month, and we do them across multiple channels, so big box as well as small box, as well as drug, as well as grocery. And we're very, very comfortable where we're at. We're right around -- right on the mark at 100% in both, which means we have price parity. And I believe -- and why we've been in this for a year now, I do believe the consumer is starting to respond to that. And remember, we had very powerful consumable growth in quarter 3 in the Family Dollar brand. It's the consumable side where that consumer is feeling that pressure. And I think you asked me a little bit about deflation. I would look at you and say, deflation will put us in a position where I think the consumer would be able to afford more discretionary items. So we'll take it as it comes. And of course, it should help us with our margin at the same time.
Jeffrey Davis:
Just to add one final point. With respect to the work that Larry and his team is doing in private brands is something that's really important for us. The ability to drive greater value for that customer, give [ her ] other options, this is something that we're really just fully getting implemented here in the fourth quarter, going into '24.
So we believe that as that customer is looking for greater value, they have more options within our private brands. It's an opportunity for us to improve our margins. And to the extent that there is sort of price deflation, there's opportunity that can actually provide even more value as we think about how we assort that particular product line.
Operator:
Next question today is coming from Chuck Grom from Gordon Haskett.
Charles Grom:
On the Family Dollar store optimization, I'm just curious how, why the comp and profitability gap exists today across the fleet?
And then I guess this question is more for Jeff. On the gross margin line for the fourth quarter, how should we think about that between each banner, [ FPO ] and the Tree and into 2024? What are the biggest puts and takes to think about?
Richard Dreiling:
Yes. Chuck, the first question, I would rather not comment at this stage of the game as the process is underway and we have started it. And I will disclose more of that as we get -- when we get into the March call. But let's say this, obviously, it's an opportunity for us that we intend to address head on.
Jeffrey Davis:
And then, Chuck, I think your question is around Q4 and as we think about gross margins, let me take it Dollar Tree first. We would expect our margins to continue to expand in gross margins in the fourth quarter, largely driven by additional freight, the mix shift, a stronger mix of discretionary as you would normally have more seasonally.
The other impact there is that as we had mentioned, we've taken approximately 90% of our inventories, we have the remaining 10%. While we don't expect that remaining 10% to have any different outcomes than we had in the past, the impact on the quarter is much less because you're only talking about a small portion of your inventories on a much larger portion of your overall performance. So our expectation is for further gross margin expansion for Dollar Tree in the fourth quarter. We also believe that, that opportunity is there for Family Dollar also for many of the same reasons as it relates to freight, less of an impact of shrink on the quarter as well as some opportunities that we have within distribution. So we'd expect margin expansion -- gross margin expansion in the fourth quarter also for Family Dollar.
Operator:
Next question is coming from Scot Ciccarelli from Truist Securities.
Josh Young:
This is actually Josh Young on for Scot. On the shrink issue, obviously, it's been a big margin headwind this year. As we think about '24, where do you guys think you are in terms of dealing with it? You've talked about some of the mitigation efforts there, but curious if you think we're still in the early innings or do you think you're starting to make some substantial progress on dealing with the problem?
Richard Dreiling:
Yes. I would say we're in the early innings, but I do feel we're making headway. The deal is that we take a physical inventory once a year. So if you make these improvements, these adjustments, you still have to wait in order to see them -- see the fruits of your labor.
Now I can tell you, we've eliminated certain SKUs in certain stores. We've put items behind the check stand counter. We've moved certain items up front, so they have a line of sight to the cashier. And the important thing is we haven't affected our sales. And I might also say, we've put in, and I forgot to mention this, an anti-sweep OTC panel that's basically like sliding doors. And you move -- it doesn't lock the counter up, but you move that little door over and you could only pull one item out at a time, which prevents a thief from coming in and cleaning out the whole shelf. So we think we're going to make progress. And I don't think it's -- we're going to have to cycle through everything. So it's not like it's going to be an overnight change. but I do believe we're moving in the right direction without having to lock product up.
Operator:
Our final question today is coming from Peter Keith from Piper Sandler.
Peter Keith:
I just want to circle back on the deflation theme because that seems to be something that's percolating out for 2024. Rick, you mentioned your customers have a little bit more money. But is it possible that deflation could be negative for the banners, thinking about maybe less fill-in trips and maybe more competition?
Richard Dreiling:
So on the Dollar Tree side, all it will do is enhance the margin because you basically have a fixed price point, so we end up getting the goods cheaper. So I can say that it could be a benefit. It might have fixed the top line a little, but it should be a benefit.
To the Family Dollar side, I would look and say it might affect the top line. But again, I can make an argument, it should enhance the margin line.
Jeffrey Davis:
It also gives the opportunity for that customer to take those dollars. And our customer today is limiting their purchases, maybe more in consumables, less in discretionary. The additional disposable income that they would have would allow them to pick up an additional discretionary that they didn't have before.
Richard Dreiling:
Yes. And again, I'd add, if we do have deflation, it allows us to invest more in the value of the product and actually give the consumer something a little bit additional.
Operator:
We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.
Richard Dreiling:
Thank you all very much for taking the time, and look forward to talking to you soon.
Operator:
Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator:
Hello, and welcome to the Dollar Tree Q2 2023 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Bob LaFleur, Senior Vice President, Investor Relations. Please go ahead, sir.
Robert LaFleur:
Good morning, and thank you for joining us today to discuss Dollar Tree's second quarter results. With me today are Dollar Tree's Chairman and CEO, Rick Dreiling; and CFO, Jeff Davis. Before we begin, I would like to remind everyone that some of the remarks that we will make today are about the company's expectations, plans and future prospects and are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties, which could cause actual results to differ materially from those contemplated by our forward-looking statements. For information on the risks and uncertainties that could affect our actual results, please see the risk factors, business and Management Discussion and Analysis of Financial Condition and Results of Operations sections in our annual report on Form 10-K filed on March 10, 2023, our Form 10-Q for the most recently ended fiscal quarter, our most recent press release and Form 8-K and other filings with the SEC. We caution against reliance on any forward-looking statements made today, and we disclaim any obligation to update any forward-looking statements, except as required by law. Also, during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided in today's earnings release available on the IR section of our website. These non-GAAP measures are not intended to be a substitute for GAAP measures. Unless otherwise stated, we will refer to our financial results on a GAAP basis. Additionally, unless otherwise stated, all comparisons discussed today for the second quarter of fiscal 2023 are against the same period a year ago. Please note that a supplemental slide deck outlining selected operating metrics is available on the IR section of our website. Following our prepared remarks, Rick and Jeff will take your questions. Given the number of callers who would like to participate in today's session, we ask that you limit yourself to 1 question. I'd now like to turn the call over to Rick.
Richard Dreiling:
Thanks, Bob. I'd like to welcome all of you that have joined our call this morning. I am sure that many of you had a chance to attend our investor conference in June. I hope the information we presented was valuable to you and that you left the event with a better understanding of the key growth strategies that we have in place to deliver $10 or more EPS by 2026.
I am confident that the team has identified the right levers to unlock the true value of our business. We are making good progress and continue to act with urgency to accelerate the pace of improvement in our merchandising, store operations, supply chain and IT infrastructure. Our renewed merchandising efforts represent a major opportunity to unlock value. We outlined our multi-price journey at Dollar Tree, detailed our real estate and merchandising initiatives at Family Dollar and reviewed our plans to improve store standards across the enterprise. We have also launched efforts to drive sales productivity and increase operating efficiency like simplifying the truck unloading process and improving in-stock levels. You heard me say many times that retail is all about growing units, growing transactions and growing sales per square foot. When these retail fundamentals move in the right direction, everything else follows. I am pleased to report that all 3 are heading in the right direction for us. For the past 2 quarters, both segments posted positive unit growth in consumables, while the market has been negative. Second quarter traffic was up over 3% at Family Dollar and nearly 10% at Dollar Tree. The fourth consecutive quarter of growth at Family Dollar and the second for Dollar Tree. And finally, sales per square foot is up 4% at Family Dollar and 6% at Dollar Tree. When it comes to our momentum in these key retail fundamentals, our ongoing merchandising efforts and the investments in labor and stores are paying dividends and setting the stage for everything else to follow. Now let me review some of our second quarter highlights. A little later, Jeff will provide a more detailed review of our results and update you on our outlook for the balance of the year. For the quarter, on a consolidated basis, we delivered an 8.2% increase in sales to $7.3 billion, with 6.9% enterprise comp growth and $287.8 million of operating income, which led to EPS of $0.91. In our Dollar Tree segment, our 7.8% comp was driven by 9.6% more traffic, with a modest offset from average ticket. Dollar Tree's momentum remained strong with this quarter's comp coming in on top of a 7.5% comp last year. Meanwhile, the Family Dollar segment continues to make good progress in its operational turnaround. The second quarter comp of 5.8% was nicely balanced between 3.4% more traffic and 2.3% average ticket growth with the strong comp trends being supported by our improved price position and merchandising efforts. While the challenging macro environment continues to pressure our sales mix in both segments, I am pleased with the gains in traffic, new customers and market share. Regarding the industry-wide shift in consumer purchasing behaviors to consumables, we believe this is reflective of the current macroeconomic environment and continuing rotation to a prepandemic balance after years of elevated spending across discretionary categories. We believe we are winning in consumables as more customers come to see Dollar Tree and Family Dollar as the compelling destinations for value. At Dollar Tree, our multi-price strategy provides flexibility to respond to changing customer needs. At Family Dollar, our improved price image and wide range of merchandising initiatives are clearly resonating with consumers. In this environment, consumers from all income levels are increasingly seeking value. We are well positioned to capture incremental share of wallet when higher income consumers respond to our strong price value proposition and when lower income customers concentrate their spending on needs-based consumables. This is particularly true across food and other consumables where value-oriented retailers are taking unit and dollar share. As a result, food categories are disproportionately driving sales momentum across the value retail landscape. Dollar Tree and Family Dollar are no exception. Our food business is especially well positioned in the current environment, and we are seeing extremely high volume growth across our frozen and center store food categories. There is also growing evidence that consumers are seeking value through private brands, expanding and improving our private brand assortment will be a significant growth vehicle for us going forward. To this end, the private brand expansion program at Family Dollar remains on track. This year, we launched over 125 private brand items, which we will further accelerate when our new family wellness and vitamin products hit store shelves in the fourth quarter. We are already seeing encouraging results across our private brands with second quarter penetration expanding by 55 basis points, units sold growing by 4% and private brand comps increasing over 15%. New customers are the lifeblood of retail and a critical part of driving traffic and market share. In the past year, we have added nearly 5 million new customers across both segments with 2.6 million of these customers having a household income over $125,000. Importantly, our research tells us that a very high percentage of these new customers come back visiting an average of 5x in the year following their initial trip. In fact, we now rank in the top 10 retailers measured by annual new customer activations. These positive traffic and new customer trends are leading to strong market share gains. For the second quarter in a row, both segments gained market share in consumables as our unit volume grew while the market's unit volume shrink. According to Nielsen data, our second quarter consumable unit volume growth outpaced the market by over 1,100 basis points at Dollar Tree and 530 basis points at Family Dollar, with both segments extending their margin of outperformance from last quarter. Shifting from our recent sales performance, I'd like to take a few minutes to update you on several key initiatives across our company. In merchandising, we have increased our Dollar Tree Plus target to 4,900 stores by year-end, up from 4,300 stores that we articulated in June. At the end of the second quarter, our Dollar Tree Plus assortment was available in over 3,600 locations and the $3, $4 and $5 frozen and refrigerated assortment was available in nearly 5,600 stores. At Family Dollar, we are on track to complete planogram resets at all of our stores by November, and we are pleased with the sales lift from these resets so far. In real estate, we remain on pace to hit our target of 600 to 650 new store openings this year with roughly 2/3 of those coming in the back half of the year. We also continue to make progress with our emerging formats at Family Dollar. We completed 271 H2.5 renovations bringing the total number of 2.5 locations to 830. We opened or converted 90 Family Dollar stores under our rural combo format. Overall, we are on track to complete at least 1,000 Family Dollar renovations by year-end. In supply chain, Mike Kindy and his team are investing in temperature control, across our distribution center network. Adding full temperature control to our DCs improves the work environment for our associates and drives improved operating performance. It also drives efficiency by reducing cross-stocking expenses and increasing flexibility to store the full range of OTC HBA products. We recently expanded temperature controls at 2 additional DCs, which brings us to 4 in total. By year-end, we expect to upgrade 8 additional DCs with the balance rolled out by the end of 2024. While still in its early days, we continue to make good progress on our roto cart rollout. Beta testing on roto cart deliveries is currently underway, and we are on track for our D.C. and Matthews, North Carolina to be roto cart enabled by the end of this year. Moving on to IT. We're also making good progress on needed upgrades to our infrastructure, particularly our new store and inventory management systems. Meanwhile, our new warehouse and transportation management systems are progressing through their development stages with rollouts anticipated to begin early next year. With the continued focus on our people, we saw double-digit improvements during the second quarter in employee turnover and store vacancy levels across both segments as the investments we are making in store level wages, benefits and elevated standards begin to yield clear intangible results. As I mentioned at our investor conference, we had a significant number of stores that don't open on time or close early due to staffing shortages. I'm happy to report that we saw a measurable improvement in this area during the second quarter at both Dollar Tree and Family Dollar. If we eliminated all 8 openings and early closings, it could add 1.5 points to our overall comp. In summary, when it comes to the factors that we can control, we continue to execute at a high level. As our recent sales performance shows, consumers are clearly responding to our merchandising initiatives. At the same time, Mike Creedon and his team are acting with urgency to upgrade our store conditions and improve operational consistency across our store fleet. We are making the investments we need to make to accelerate our top line performance, generate greater operating efficiencies and improve profitability. We've built a strong cultural foundation as an organization, and we are focused on delivering better results for all our key constituents including our more than 200,000 associates. And speaking of our associates, we've just spent the last 2 weeks meeting with our field leadership at our headquarters here in Virginia. A team of more than 1,300 leaders who represent more than 200,000 associates and the energy coming out of those sessions was amazing. Our people are the key to a great customer experience, and I am so grateful for the progress we've made in our turnaround efforts over such a short period of time. I will now turn the call over to Jeff to review our financial results and outlook for the balance of the year.
Jeffrey Davis:
Thank you, Rick, and good morning, everyone. In the second quarter, we continued to generate strong top line results across both segments, driven by growth in customer traffic, unit volume and an accelerating market share. We continue to have a favorable view of the current operating environment. Our top line performance was not driven by any material increase in promotional intensity.
While our sales mix continues to shift towards consumables, we generated more gross profit dollars in the second quarter than we did last year. We also remain resolute in our strategy to make the necessary investments in stores, IT, supply chain and our people. On a consolidated level, operating income declined 43.1% to $287.8 million and operating margin compressed by 360 basis points. This was driven by a 220 basis point decrease in gross margin and a 130 basis point increase in SG&A expenses. Gross margin contracted primarily from lower merchandise margin as we lap the margin benefit from last year's $1.25 rollout and from unfavorable sales mix, product cost inflation and elevated shrink. SG&A expenses expanded primarily from wage investments, incentive compensation, general liability claims, and repairs and maintenance costs from improving store conditions. These were partially offset by leverage from increased comp sales and lower stock compensation expense. Notably, the impact of general liability claims was $0.07 for the quarter. Our effective tax rate was 24% versus 24.2% last year as higher work opportunity tax credits were partially offset by higher nondeductible expenses. Net income was $200.4 million and diluted earnings per share was $0.91 versus $1.60 a year ago. At a business segment level, Dollar Tree's operating income declined 27.8% to $397.8 million and operating margin compressed 510 basis points. This was driven by a 400 basis point decline in gross margin and a 110 basis point increase in SG&A expenses. Gross margin contracted primarily from lower merchandise margin as we lapped the margin benefit from last year's $1.25 rollout and from unfavorable sales mix, product cost inflation and elevated shrink. These were partially offset by comp sales leverage against occupancy costs. SG&A expenses expanded principally from wage investments, minimum wage increases, general liability claims, utility costs and repair and maintenance costs for improving store conditions. These were partially offset by sales comp leverage. Family Dollar's operating income declined 78.5% to $11.8 million and operating margin compressed 140 basis points. This was led by a 30 basis point decrease in gross margin and 110 basis point increase in SG&A expenses. Gross margin contracted primarily from elevated shrink with a partial offset from leveraging occupancy costs. SG&A expenses also increased principally from wage investments, minimum wage increases, utility costs and repairs and maintenance costs from improving store conditions. These were partially offset by sales comp leverage. Moving onto the balance sheet and cash flow. As a reminder, my comments reflect balance sheet comparisons between Q2 2023 and Q2 2022. Inventory decreased by 1.7%. While inventory was below last year's level, it was elevated due to early receipts of imports. With the rapid recovery across our supply chain, seasonal imports from Asia arrived well ahead of our scheduled third quarter receipts. Moving forward, we will continue to manage our inventory and related trade accounts payable to improve free cash flow generation. Capital expenditures were $425.4 million in the second quarter versus $276.2 million last year. reflecting elevated investment levels in new store openings and renovations, supply chain and information systems. For fiscal 2023, we expect capital expenditures will total approximately $2 billion, with approximately 40% allocated to maintenance CapEx and the balance towards growth initiatives. Free cash flow improved $40.5 million versus the second quarter of last year. This represents the third consecutive quarterly improvement in free cash flow generation, even as we make significant investments to support the long-term growth of the business. For the first 6 months of 2023, free cash flow improved $157 million versus the same period last year, led largely by lower merchandise inventories with a partial offset from lower net income adjusted for noncash items, increased CapEx and the timing of accounts payable. In the second quarter, we repurchased approximately 700,000 shares for $99.9 million, including applicable excise tax. At quarter end, we had $1.6 billion remaining under our share repurchase authorization. Cash and cash equivalents totaled $512.7 million compared to $688.9 million a year ago. In July, we established a new commercial paper program to issue unsecured notes with maturities up to 397 days with an aggregate face amount outstanding at any time of $1.5 billion. We expect to use the net proceeds for general corporate purposes. The notes will rank pari passu with all other unsecured and unsubordinated indebtedness. Our revolving credit facility will serve as a liquidity backstop for the repayment of outstanding notes under this program. This new program provides additional flexibility to manage our working capital needs and at current rates, it provides short-term borrowing at lower rates than our credit facility. There are no notes issued and outstanding as of the end of the quarter. Now let me provide some additional visibility into our sales and EPS expectations for the third quarter and the balance of 2023.
At a high level, we are reiterating the center point of the full year outlook we gave last quarter and bringing in the high and low end to better reflect the balance of opportunities and risks we see in the current operating environment. Our outlook takes into consideration the following factors:
continued shift in sales mix and unfavorable shrink trends over the balance of the year, our utility and repairs and maintenance costs related to the national heat down, higher diesel fuel prices.
On the Plus side, we expect improved sales performance and incremental ocean freight savings. That all said, we see nothing systemic or structural in the current environment that would have a lasting negative implications for the multiyear outlook that we shared in June. So against that backdrop, we expect consolidated net sales for the third quarter will be in the range of $7.3 billion to $7.5 billion. Based on a mid-single-digit increase in comp store sales for the enterprise in each of the segments. We estimate third quarter diluted earnings per share will be in the range of $0.94 to $1.04. For the full fiscal year, which includes a 53rd week this year, we are raising our 2023 sales expectations to a range of $30.6 billion to $30.9 billion, driven by a mid-single-digit increase in comp store sales across both segments and the full enterprise. Based on better visibility into the margin headwinds I just detailed, we are narrowing our full year diluted GAAP earnings per share outlook to a range of $5.78 to $6.08, including the $0.12 legal reserve we talked in the first quarter.
We still expect selling square footage to grow between 3% and 3.5% for the year and new store growth to be back-end weighted. Other considerations in our 2023 outlook include the following:
We have not included any assumptions for incremental share repurchases; depreciation and amortization should be in the range of $845 million to $850 million; net interest expense should be approximately $25 million for the third quarter and approximately $110 million for the full year.
We are assuming an effective tax rate of approximately 23% and for the third quarter and approximately 24% for the full year. We expect 220.6 million diluted shares for the third quarter and 221 million diluted shares for the full year. Our outlook reflects continued margin pressures that we expect to persist through the back half of the year. Based on our continued market share gains at both Dollar Tree and Family Dollar, we are in a good position to generate higher levels of rebates and promotional allowances. We also continue to be disciplined in managing our cost structure, even as we make investments necessary to meet our stated long-term growth objective of $10 or more of EPS by 2026. Now I'll turn the call back over to Rick for closing remarks.
Richard Dreiling:
Thank you, Jeff. We remain very pleased with the progress of our transformation in these early stages and remain confident in the 3-year road map outlined in June. For those of you familiar with my operating philosophy, the immediate focus of any retail turnaround is growing sales. From that perspective, we are succeeding.
We are providing a new experience to the next generation of customers across both our segments and seeing strong repeat purchase activity from these new shoppers. Our goal is to provide the consumer with convenience, value, variety and a great shopping experience. Our stores are already conveniently located. 87% of the population of the Continental United States lives within a 5-mile radius of one of our stores. As we grow our footprint, we will be closer and more convenient to an even greater number of customers. I remain confident that our long-term earnings potential can be realized within the time frame we have communicated. Our improving top line performance places us in a position of strength and the combined impact of our merchandising, real estate, supply chain, IT and people initiatives should put us in an even stronger position relative to the competition. Operator, Jeff and I are now ready to take questions.
Operator:
[Operator Instructions] Our first question is coming from Mike Lasser from UBS.
Michael Lasser:
So with the knock on the transformation at Dollar Tree has been that it's just going to take a lot more heavy lifting, a lot more investment than what was originally anticipated. And the fact that your sales are trending better than what was expected is a good sign, but it does not seem like the profitability is flowing through. So, a, do you have a good handle right now on all of the ins and outs of the different considerations with the profitability. And b, as you look towards the next 12 months, there's going to be a benefit from lower supply chain costs. Is that going to flow through? Or will you use that as a source of further savings to then reinvest that back in the business to drive the $10 of earnings several years out.
Richard Dreiling:
Yes, Mike, 3 really good questions. First off, is the lift heavier than we thought it was going to be. I would say no. When we all got in on this, we knew what we were facing. I do think what we're trying to do, because of what has to be done, we are moving much faster than I thought we would. And when you move fast, it takes a little more expense, it takes a little more effort, it takes a little more push. And so is the lift heavier? No, it's the same. But what we're trying to do is move as fast as we possibly can.
In regards to the drop-through, I think we are learning to do a lot of things, flexing a lot of muscles that we have not used in the past. The Family Dollar side is all about the commitment you make to the vendor community. And Jeff called out the potential for increased rebates and allowances that's all driven by retail execution. And the Family Dollar people are doing a really terrific job on that. What has happened on the Dollar Tree side, the Dollar Tree people have responded to the change in patterns that the consumer is exhibiting in our store, buying more consumables. So I think and I always have subscribed to the fact that when top line starts moving, everything else catches up. I remain incredibly bullish on our margin targets and where we're going. And I do not see any trouble to getting to more realistic margin levels. In regards to the improvements in the supply chain, that will be a combination of both. As you know, we've got massive changes taking place on the supply chain side. Some of that will make it to the bottom line and some of it will invest. And Jeff, I don't know if you have anything you want to add?
Jeffrey Davis:
Yes. There's a couple of additional items, Michael. We -- as it relates to the flow-through, and we tried to call us out -- it's really a situation where our sales mix is an area that, as you see across the retail landscape, people are moving more into consumables, and that we're not immune to that. The other area that we talked about was shrink and the ongoing progression there. Those are the 2 more significant items from a gross margin basis that are really impacting us and addressing the flow-through or restricting the flow through.
The other thing that it's kind of muted in our comments, but this past quarter, we had about $0.07 related to an accrual adjustment that we needed to make for the progression of certain general liability claims that really dated back to 2019 and 2020 during the pandemic period. Once again, something that we needed to take care of, but it also restricted the flow through and the tremendous sales that we were driving over the course of the year. So I think that we're seeing right now, we've called out in the past and reason for our adjustment in the overall guidance that we gave last quarter, which was around sales and shrink. And then it was just further exacerbated, unfortunately, with this accrual adjustment we need to make.
Operator:
Our next question today is coming from Edward Kelly from Wells Fargo.
Edward Kelly:
I wanted to dig in on the core Dollar Tree gross margin this quarter. If we think about the 33.4%, it's obviously a step back versus where you were in Q1. I was hoping that you could talk a little bit more about the incremental pressures? And then how we think about the back half, you had previously talked about a 36%, 37% gross margin for the year. Obviously, that's coming down. So thoughts there.
And then just as it relates to all of that, how does this inform the longer-term target of 35.5%, 37.5%. It looks like this year, you maybe even below the low end of that range. What does it take to get to the middle end of that range? Do you need the backdrop to normalize demand, obviously you got freight coming in, but I'm not sure shrink is bottomed. Just thoughts around all of that, I think would really be helpful.
Richard Dreiling:
Yes. Great question again. What's happening in Dollar Tree as we were responding to the needs of the consumer. You go back a year ago, we did not have nearly the number of consumable SKUs that we now have in the store. Saying all that, our discretionary business on the Dollar Tree side was slightly up. But what -- when I think about quarter 3, particularly or quarter 4, we're going to be in a much stronger position on the margin due because of the change in the mix, we think is going to happen. And that's because quarter 4 is a very seasonal quarter for us with Christmas and Halloween and all of that. So I remain bullish on it. I do believe, Ed, that we are responding to the customer and sales takes care of everything eventually, and the 2-year stack in Dollar Tree is just outstanding. So I remain very, very bullish on where we're going with the margin.
Jeffrey Davis:
And Ed, the other thing I would add to that, hopefully, I hope don't sound like a broken record here, but -- unfortunately, the headwinds we're having in shrink are muting our margins right now. When you get a chance, you have an opportunity to take a look at the supplemental presentation that we have, you'll see that shrink is continuing to be -- restrict our margins by about 75 to 80 basis points on a year-over-year basis. We are taking the appropriate actions, we believe in the organization to start to address that. As you know, shrink is a sort of a trailing indication because stores are shrinking over the course of the year. And as you're adding new actions to reduce it, it takes time for those things to actually take hold. But between the sales mix and the shrink once again, this is one of the things that have been muting the margin.
The other thing that while we are seeing less frequency of product cost increases and maybe the magnitude of those are not as significant. They are still in the marketplace. And Rick McNeely and his team are freeing our ways to work through those through a number of different merchandising actions. So we still have a little bit of headwind there on product cost pressures, which as we move forward, depending on consumer demands, we believe that those will start to -- should start to abate over time.
Operator:
Your next question is coming from John Heinbockel from Guggenheim Securities.
John Heinbockel:
Rick, my question is multipart, really revolved around the $3, $4, $5, right, frozen and cooler. So can you maybe talk about the experience you're seeing because that clearly has to be lifting consumable comps. Your thought on the rollout, not just to all stores, but then expanding doors, right, getting to more than 3 doors today. But on the rollout and then the impact that that's having on traffic, that is hitting discretionary, right? And then ultimately, do you think that, that should -- it should hurt gross but the increased ticket, right, should positively impact expense control over time. So maybe your thought on that as it impacts the Dollar Tree P&L?
Richard Dreiling:
Yes. Another effort that we're working really, really hard on. In regards to the number of cooler doors, we're going to go from 3, I believe, 10 or 12 is the plan. We'll have a door that is a $1.25, couple of doors will be $3, $4, $5, and we're actually looking as we look at the multi-price point to expand that even more. The interesting thing is when a frozen food item goes into the basket, the basket actually gets larger. So your point about driving traffic, driving transactions is spot on. The other interesting thing, when we went to $3, $4 and $5, that allowed us to offer a family serving versus at $1.25, where it's just a single serve. So again, much more appealing to the actual -- to the consumer.
The other thing, John, the fact that we went to multiple price points allowed us to put ice back in the stores. And ice is always a big seller. When we were locked in on the dollar, we had to take it out and we went to a larger bag, 7 pounds, took it to $2. And again, we're back in the ice business. I also agree that what will happen is we will keep growing sales and allow us to leverage our SG&A down in the stores. And then I also want you to think about the fact as we roll roto carts out, that we'll be delivering to the Dollar Tree stores and those also. So all of that time that it takes to unload a truck will be invested in putting more multi-price point items out on the shelves.
Operator:
Next question is coming from Paul Lejuez from Citi.
Paul Lejuez:
Curious if you could talk about the monthly trend for each segment. Also curious to hear about performance in urban versus suburban and rural locations. And anything that you would say in terms of the competitive landscape that you see changing out there from a pricing perspective?
Richard Dreiling:
Yes. Great question. As I look at the flow across both banners through the quarter, it was pretty consistent all the way through. We started off strong, and it remained strong through the balance of the quarter.
There -- in terms of performance, I think it's pretty even, but I will make this observation. It appears that the trade down from a higher income customer it's coming more in the urban environment than in the rural environment. So that's -- it's an interesting spin, but it's pretty even all the way across. In regards to the competitive environment out there in regards to pricing, the way I see it, it's very rational right now. Nothing significant is going on. I would say the ad collateral is basically the same it's always been. Everybody's kind of -- I think everybody is on the same playing field right now.
Operator:
Our next question is coming from Matthew Boss from JPMorgan.
Matthew Boss:
Great. So maybe a 2-part question, Rick, at the Dollar Tree banner, could you elaborate on the traffic trends? It seems like that's the real positive progression here. Any change in momentum that you've seen in August? And maybe just speak to market share trends that you're seeing by category at Dollar Tree. And then, Jeff, on the expense front, I guess, is there a way to think about the progression of the foundational investments that you've been putting in place as we think maybe beyond this year? It seems like store standards and wages, maybe 2 of the more stickier initiatives. Or maybe just ask differently, what do you see as the comp that we need to leverage fixed costs maybe next year in the model?
Richard Dreiling:
I'll take the first part, Jeff. Matt, the traffic is steadily increasing in Dollar Tree. Our traffic was up 9% in quarter 2. Really, really pleased with that. Your other question is discretionary was still up in Dollar Tree. It was up 3.9%. The consumables though, were up over 11%, which is our way -- and remember, consumables drive that traffic. And we have, by unlocking that price point -- and as we continue to unlock the price point, it's going to open up more opportunities for us to bring in really powerful value items. So pleased with customer traffic. In fact, I'll throw this in. Customer traffic was up 3.4% on the Family Dollar side. So we are seeing movement now with the customer base.
Jeffrey Davis:
And as it relates to the investments that we're making, they're really twofold. So you have expense mix investments as well as CapEx. As we think about the expense investments, I think you're spot on with respect to the wage and store standard elements. There's a few elements that also transcend into our supply chain as we need to increase and improve the standards in our DCs. We're right on track with respect to how we thought they would play out over the course of this year and then as we think about going into next year.
From a CapEx perspective, you kind of layer on top of that, then the work that we're going to be doing with our roto cart rollout and what we need to do with trailers and lift gates in the actual to other parts as well as what we're going to be doing from an IT perspective in adding additional capabilities with systems. As you think about what's the level of comp that we're going to need to deliver. There's going to be a number of factors that you have to take into account and quite honestly, we are working through that right now as we look out. One is going to be what's going to be rate of inflation as it relates to our cost in the marketplace, especially in labor, which is one of our more significant areas. The other piece, of course, is going to be in sales mix. The comp, you need a little higher level of comp when your sales mix is more weighted towards consumables versus discretionary. We believe, over time, we're going to see this mix balance out and then be not as significant a shift on a year-over-year basis, which you're seeing right now. Once again, that's over the long term. We had talked a little bit about this in the Investor Day, where we think that both Family Dollar and Dollar Tree will kind of average out over the period of time. So I'm not going to give you a comp number that we need to meet in order to leverage expenses at this point in time because there's a number of factors that we need to give a little more thought to and quite honestly, depending on what the economy does.
Operator:
[Operator Instructions] Our next question is coming from Simeon Gutman from Morgan Stanley.
Simeon Gutman:
Wanted to just clarify and then ask the follow-up, all in one. The higher expenses this quarter, parsing it out between inflationary pressures being a little bit higher? Or are you spending more than planned or than you thought? And then bigger picture, the $10 in 2026, a long way to get there gives you flexibility. I don't think you've said it's ratable in any way. It may not be linear. What happened with expenses show that you're not afraid to spend back into the business. So curious where you're tracking. I'm sure you have your own plan and where '24, I know it's an early look, may land in terms of that run rate of expenses?
Jeffrey Davis:
Great question. And I'm glad that I got this question finally. One of the things that if you take a look at this quarter and the pace that we're on, we are right on our outlook that we had anticipated with respect to the level of spend in the transformation. And we are actually leveraging against our original forecast, given this strong sales performance. This is also taking into account once again, unfortunately, this accrual adjustment that we just needed to make.
So as we move forward, we continue to be disciplined in our spend. We look, as Rick has said, in some situations, an opportunity to pull forward a few items if we believe that we're going to be able to get the returns that much sooner. But the rate at which we are investing is according to our original outlook that we were we said at the beginning of this year. There are some modest inflationary components, as you can imagine, predominantly in utilities, and it is, as a result of the heat down that we're seeing on a national basis. The other area we're seeing a little more inflation would be in fuel, particularly in diesel fuel. And we've seen that here most recently and is reflected in -- both of these items are reflected in our guidance for the back half of this year.
Operator:
Our next question today is coming from Kelly Bania from BMO Capital Markets.
Kelly Bania:
I just wanted to go back to the shrink and mix and just be clear about the magnitude that is maybe coming in different or the same versus your expectations. And also how those 2 factors are planned for the second half. And also just related to the shrink, what kind of margin investment at all do you see necessary to combat the shrink headwind? And is that in your long-term plan?
Jeffrey Davis:
Great. Thank you, Kelly. There's a few things here. As we think about shrink and mix, it has definitely advanced a little further than what we had anticipated in our guidance that we had given last quarter. Having said that, we believe that there are other more favorable items that are helping to offset against that. One, in our sales momentum; Two, we are seeing additional freight opportunity as it relates from an ocean perspective. But as it relates to shrink and mix, we had mentioned earlier that we had about $0.55 in total expected as an adjustment to our comp -- to our earnings, and that was going to be spread pretty evenly between shrink and mix. Of that $0.55, about $0.15 of that was actually incurred in the first quarter. So that remains -- that gives you a $0.40 for the back for Q2 through Q4.
In Q2, against our original forecast, shrink and mix advanced another $0.08 on us. All of this is included in our forecast and as we're thinking about the back half, to the extent that there is any further acceleration, how we're thinking about offsetting that through other margin opportunities as we think about once again from additional freight favorability and/or other options that we have through the P&L.
Richard Dreiling:
So -- and I'd like to add 1 thing, if I can, Jeff. We are now taking a very defensive approach to shrink. And it's taken us a quarter, but we have several new shrink formats that we'll introduce in the back half of the year. And it goes everything from moving certain SKUs to behind the check stand. It has to do with some cases being locked up. And even to the point where we have some stores that can't keep a certain SKU on the shelf just discontinuing the item. So we have a lot of things in the works that's going to roll forward. You had a question about the mix. Is that correct?
Kelly Bania:
And what's in the back half assumption?
Jeffrey Davis:
She's asking specifically what's in the back half assumption, which I have not provided.
Richard Dreiling:
Yes. Okay. Fair enough.
Jeffrey Davis:
So let me -- what I gave was a pretty widespread answer. If you think about the balance of the year, in Q3, what we've said and really in the back half of the year, Q3 sales mix and shrink continues to be a headwind for us. We've taken approximately 70% to 75% of our stores and inventories. So we'll be through the balance of most of those stores by the end of the third quarter. So sales mix and shrink continues to be a little bit of a headwind for us.
Freight as far as diesel fuel continues to be a little bit of a headwind for us. And then once again, I said from utilities and this heat down back on this to be a little bit of a headwind for us. Offsetting that is going to be certain tailwinds. We've got sales momentum that we are projecting. We know that we believe that we have opportunities in additional freight from an ocean freight perspective. And also, we are starting to lap many of the SG&A investments that we started last year. As you go further into the back half of the year, we have less impact of sales mix and shrink because once again, we've taken all of our inventory. Fourth quarter is a much stronger quarter for us from a seasonal perspective, and it's focused on discretionary. And then the tailwinds in the back half or in the fourth quarter. Once again, we have the 53rd week, which we'll make an adjustment for continued sales momentum in our projection, ocean freight. And then once again, we can further along in lapping those SG&A investments that we started in the back half of last year. So as we progress through the quarters, the fourth quarter, we believe, will be one of our strongest quarters because we have less headwinds from shrink and mix, as well as the sales momentum and continued oceanic freight opportunity.
Operator:
Your next question is coming from Chuck Grom from Gordon Haskett.
Charles Grom:
My question is on Family Dollar. I was wondering if you could speak to the progress on rolling out the higher shelf freights across the chain? And then just one for Jeff. On that $0.07, which banner was that in? Or was that in the corporate line?
Richard Dreiling:
Yes. In regards to the 78-inch profile, we hope to have that complete towards the end of the year. I would say we're probably maybe 40% or 50% done. While we're doing the Family Dollar side, we're also going to do the Dollar Tree side. So we're making progress on it. And the H2.5 remodels, all of those have the new shelf profile in. And by the way, the shelf profile raise allows us to add more cooler doors and refrigerated.
Jeffrey Davis:
Yes. And on the journal liability claims, it was across both banners, and the best way to think about it was pretty evenly split.
Operator:
We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.
Richard Dreiling:
No, thank you all for your time and look forward to talking to you soon.
Operator:
Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.
Operator:
Good day, and welcome to Dollar Tree Q1 2023 Earnings Call. Today's call is being recorded. At this time, I will now turn the call over to Randy Guiler. Please go ahead, sir.
Randy Guiler:
Good morning, and welcome to our call to discuss results for Dollar Tree's First Quarter Fiscal 2023. With me on today's call are Chairman and CEO, Rick Dreiling, and CFO, Jeff Davis.
Before we begin, I would like to remind everyone that various remarks that we will make about 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. These statements are subject to risks and uncertainties, and our actual results may differ materially from those indicated in these forward-looking statements. For information on the risks and uncertainties that could affect our actual results, please refer to the Risk Factors, Business and Management's Discussion and Analysis of Financial Condition and Results of Operations sections in our annual report on Form 10-K filed March 10, 2023, our Form 10-Q for the most recently ended fiscal quarter, our most recent press release and Form 8-K, and other filings we make from time to time with the Securities and Exchange Commission. We caution against reliance on these forward-looking statements made today and we disclaim any obligation to update or revise these statements, except as may be required by law. Also during this call, we will discuss non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financials are provided in today's earnings release and SEC filings. These non-GAAP measures are not intended to be a substitute for GAAP results. Unless otherwise stated, we will refer to financials on a GAAP basis. Unless otherwise stated, all first quarter comparisons for fiscal 2023 are against the same period a year ago. Please note that a supplemental slide deck that outlines a number of the company's key operating metrics is available on the IR portion of our website. Following our prepared remarks, Rick and Jeff will take your questions. [Operator Instructions] I will now turn the call over to Rick.
Richard Dreiling:
Thank you, Randy. Good morning, everyone, and thank you for joining our call. As many of you are aware, Dollar Tree will be hosting its investor conference in 4 weeks on June 21 in Norfolk, Virginia, near our corporate headquarters. The conference will be webcast, and I hope to see many of you at this important event. Our investor conference has been overdue, and we understand the level of anticipation for many investors. I hope next month's gathering will provide each of you a better understanding of the transformation taking shape and the speed with which we are making these changes to increase both our productivity and profitability at Dollar Tree and Family Dollar.
We have been hard at work building the team we need to drive the transformation of this business. The more we dig in, the more historically clear the opportunity becomes, and we are on our way to most fully realize upon it. Our stores are of comparable size to those of our closest peers, but they generate far less revenue per store. We understand why, and we know how to close the gap. There are no structural impediments to our progressing towards this goal. As we do, we will drive growth and gain market share. With the operating leverage embedded in the retail model, accelerating growth in revenue per store will translate into higher margins, and higher margins will increase our return on capital and fueling accelerated store growth. We've gone down this road before, and we know the way. We have a tremendous opportunity to improve both of our segments, and we are pursuing that with vigor. While our enterprise-wide transformation is still in the early stages, we are already seeing results. Our early initiatives have begun to deliver growth and market share gains. We are driving this transformation in the most dynamic retail environment I have seen in my career. While this volatility is real and will generate bumps along the way, it will not affect where this great adventure ends. In addition to the historic levels of inflation and labor market challenges, retailers have seen in just the past quarter, elevated levels of shrink and even further pressure on the consumers' willingness to spend on discretionary goods, shrink and the mix shift from discretionary goods have pressured margins throughout retail. We are no exception. Ultimately, shrink will either be resolved through defensive merchandising, store closures and/or through government action at the local level. Regarding the near-term unfavorable impact of consumables mix, we believe consumer shopping behavior will normalize over time and the margin profile will rebound. We are acutely attuned to each of these bumps. In the end, none will materially affect our delivering on the promise of this transformation unless we allow them to distract us from what we know we have to do, and we will not allow that to happen. We bench our top line sales performance primarily on 3 specific metrics. Sales per square foot growth, growth in transaction count and unit sales or volume growth. Based on these 3 metrics, I am pleased with our quarter 1 performance and the direction we are headed. Overall, the fundamentals of our business are strong. Most significantly, we continue to gain market share, and our traffic and unit volume growth are driving strong top line momentum. The market share gains are a clear validation of the actions that we have taken on pricing and wages and the ongoing improvements we have made in our merchandise assortment, service level and store standards. Now, despite our commercial success and building momentum, we are experiencing near-term margin pressures from the macro factors impacting sales mix and elevated shrink. But the most important message that I want to convey today is that we remain completely focused on delivering on our full potential and are executing on our transformation investments at full speed. I will now review the highlights for quarter 1. Following my remarks, Jeff will provide a detailed overview of our financial performance and our updated 2023 outlook. For the quarter, we delivered $7.32 billion in sales, an increase of 6.1%, with enterprise comp growth of 4.8% and operating income of $419.7 million, leading to EPS of $1.35 and adjusted EPS of $1.47, when adjusting for a $30 million accrual related to pending legal matters regarding our West Memphis distribution center. Our merchandising and execution remain strong, with comp increases of 3.4% at Dollar Tree and 6.6% at Family Dollar. The underlying sales strength was concentrated in consumables and driven by meaningful transaction growth across both segments. Results were even more impressive in the context of Dollar Tree's 11.2% comp increase from a year ago. After fully cycling the $1.25 price point in February, customer traffic remained very favorable at Dollar Tree as comparable traffic count increased by 5.5%. Notably, this was the fourth consecutive quarter of sequential improvement in comps at Family Dollar, with comp traffic up 4.3%. For nearly all of 2022 comp traffic counts trends in both segments were negative, so quarter 1 was an important inflection point for the company, with traffic increasing both sequentially and year-over-year. The turnaround at Family Dollar is gaining meaningful traction. In addition to the improving traffic, Family Dollar's comp was driven by a 2.2% increase in average ticket. At Family Dollar, we increased our private brand penetration by approximately 80 basis points. Moving forward, we expect to continue growing private brands penetration as we further improve merchandise, presentation, packaging and quality control standards. For example, we recently opened a new test kitchen here in Chesapeake and are excited about our growing pipeline of private brand products across consumables, health and beauty and other high-growth categories. We are also encouraged by the margin opportunities associated with expanding our private brands business. Last year, we took pricing actions at Family Dollar to bring us more in line with our most direct competition. These price investments strengthen our value offering at Family Dollar and followed our transition to the $1.25 price point at Dollar Tree, along with investments in wages and store standards, the steps we have taken on pricing across both segments are critical to improving our long-term financial and operating performance. As I mentioned earlier, the consumer continues to be under pressure. There are simply fewer dollars available to them, and those dollars are not going as far as they did a year or 2 ago. We are past the multiple rounds of government stimulus. SNAP dollars have been reduced and tax refunds are running lower. These impacts, combined with persistent inflation, have more families prioritizing needs over wants. Both Dollar Tree and Family Dollar are part of the solution for shoppers buying for need and close to need as they look to stretch their paychecks. Our stores are nearby, easy to shop, and provide tremendous value. While these factors are contributing to the mix shift and pressuring our gross margins, they are also driving more shoppers into our stores with increased frequency. We will continue to respond to the needs of the consumer across both consumables and discretionary categories by offering tremendous value and a great selection. While this mix shift towards consumables is clearly a margin headwind, it is worth noting that the promotional environment remains rational and is not driving any additional margin pressure. At Dollar Tree, we made great strides with our multi-price strategy, and we remain on track to add $3 and $5-plus items to another 1,800 stores this year. In quarter 1, we added Dollar Tree Plus assortments to more than 400 stores and anticipate accelerating the pace of this rollout over the balance of the year. Additionally, we have aggressively expanded our product assortment at Dollar Tree stores with $3, $4 and $5 frozen and refrigerated products, adding 3,500 stores last year alone on this initiative. During the first quarter, we added multi-price frozen and refrigerated doors and more than 400 Dollar Tree stores. Both our Dollar Trees Plus and our multi-price frozen assortments drive incremental sales, with average ticket more than doubling its stores that we have added this expanded offering. Consumers are clearly responding, and the sales driving initiatives are already having a measurable impact on our results. Family Dollar, we are on track to add 16,000 new cooler doors in 2023. This is helping drive Family Dollar to its highest market share in close to 4 years as measured by quarter 1 dollar volume. On a unit volume basis, Family Dollar's quarter 1 share of industry growth was the highest in more than 3 years. We continue to improve the in-store experience at Family Dollar and completed more than 250 store renovations in the quarter. On last quarter's call, I shared the strategic rationale for our increased SG&A spending in 2023. These investments should be pursued as rapidly as our management bandwidth will allow. The sooner each is implemented, the sooner we will enjoy the benefits and the greater impact of our other investments. All of this is ultimately connected and interdependent. Many of our investments will be ongoing, including those on our associates and store conditions, and again, the results are starting to come in. We have already seen meaningful improvements in sales momentum and reduced associate turnover. In closing, we have a plan. I'm confident this plan will drive meaningful top line growth, increase productivity and improve profitability. We are vigorously executing on it. We will not allow bumps in the road to distract us or slow us down, and it's clear it's starting to work. Our investments in price, our stores, our merchandise and our associates have already begun delivering results. We will get to where we're going, but how we get there matters as well. I firmly believe that investments in our people and the communities we serve are the cornerstones of a successful retailer. We have taken a comprehensive approach to improve wages and benefits for our people and to increase associate engagement to make Dollar Tree and Family Dollar great places to work and grow. It is vital for the continued success of our organization to have a strong culture. While there is work to be done, we are pleased that our culture efforts are taking root and building the foundation for a thriving future. Finally, I am so very proud of the tremendous efforts of our 200,000-plus associates, each of whom has contributed to the great progress we are making and each of whom deserves our collective thanks. While Jeff will cover our outlook in more detail, I want to emphasize that we remain confident in the outlook for our business and our continued sales momentum. Our go-to-market strategies at Dollar Tree and Family Dollar are working and clearly resonating with consumers. I look forward to sharing more detail on our long-term vision and our multiyear outlook next month at our investor conference. I will now turn the call over to Jeff.
Jeffrey Davis:
Thank you, Rick, and good morning, everyone. As Rick mentioned, our top line performance was strong in both the Dollar Tree and Family Dollar segments. It was driven by meaningful growth in customer traffic, continued market share gains and an increase in underlying unit growth. Total sales increased 6.1% to $7.3 billion based on comp store sales growth of 4.8%. Traffic increased 5% on a consolidated basis, and average ticket was down slightly. Across the enterprise, our sales mix of consumables increased approximately 200 basis points as customer purchase behavior responded to deteriorating macro conditions.
Our service levels were particularly strong in Q1. In-stock positions improved by 400 basis points in the Dollar Tree segment and by 200 basis points at Family Dollar. Our DC service levels also improved for both segments by nearly 1,600 basis points at Dollar Tree and approximately 500 basis points at Family Dollar. Operating income decreased by 43% to $419.1 million. Adjusted operating income decreased by 39% to $449.7 million. Recall that in Q1, we cycled the first full quarter of the $1.25 price point transition at Dollar Tree, which resulted in unfavorable margin comparisons given the outsized benefit we saw in Q1 last year. The variance between operating income and adjusted operating income came from a $30 million accrual related to previously disclosed legal proceedings associated with our Family Dollar distribution center in West Memphis, Arkansas. Gross profit decreased by 4.7% to $2.23 billion as gross margin contracted by 340 basis points. The biggest driver of the gross margin decline was merchandise cost. In Q1 last year, we benefited from the rollout of the $1.25 price point at Dollar Tree. In the current period, our sales mix shifted approximately 200 basis points towards lower-margin consumable merchandise. The impact of higher cost of goods and unfavorable sales mix were partially offset by lower freight costs and markdowns as we cycled the impact of our West Memphis DC closure last year. As Rick noted, elevated levels of shrink represent a persistent challenge. In Q1, shrink negatively impacted gross margin by 60 basis points and EPS by an incremental $0.14 per share compared to last year. On a business segment basis, Dollar Tree gross margin declined by approximately 530 basis points, primarily from lower merchandise margin based on the higher consumable mix and cycling the initial transition to the $1.25 price point, elevated shrink expense and increased distribution costs. We benefited modestly from lower spot rates for ocean freight relative to last year. But to date, this is only impacting a small portion of our shipments with a larger impact of savings from freight rate declines to come in the second half and into the years ahead. Family Dollar's gross margin decreased by approximately 100 basis points, with largely the same factors contributing to the decline as Dollar Tree. Specifically, gross margin was negatively impacted by mix, product cost increases, higher shrink and higher distribution costs, partially offset by lower markdowns and lower freight expenses. SG&A as a percentage of revenue increased 150 basis points to 24.8%. The biggest driver was wage investments for store and distribution center associates. We also experienced higher store facility costs as we continue to focus on improving store conditions as well as higher professional and marketing expenses. Corporate, support and other expenses were 1.7% of revenue, down approximately 10 basis points from last year. Net income was $299 million, and EPS was $1.35 in comparison to $2.37 a year ago. Adjusted net income was $325.1 million and adjusted EPS was $1.47. The $0.12 adjustment was related to the West Memphis legal accrual. Our effective tax rate was 24.1% versus 23.1% last year, reflecting lower stock-based compensation deductions and higher nondeductible expenses, partially offset by higher work opportunity tax credits. Adjusted for the impact of the West Memphis accrual, the Q1 implied tax rate for this year was 23.3% or 20 basis points higher than Q1 last year. Moving to the balance sheet and cash flow, my comments will reflect balance sheet comparisons at the end of Q1 2023 versus Q1 2022. Inventory increased 6.5% primarily from an increase in merchandise costs, DC unit volume growth, the continued rollout of our Dollar Tree multi-price inventory and new store growth. The quality of our inventory remains high and manageable. Q1 capital expenditures were $350.4 million versus $253.4 million. For fiscal 2023, we continue to expect capital expenditures to total approximately $2 billion, with approximately 40% dedicated to business continuity and the balance directed towards growth, optimization and productivity improvement. In Q1, we repurchased approximately 1 million shares for $151.1 million, of which $7.7 million did not settle until after quarter end. Cash and cash equivalents totaled $872.8 million compared to $1.2 billion. Our cash position increased $230 million in Q1 from the end of fiscal 2022 led by working capital improvements, partially offset by capital expenditures and share repurchases. Free cash flow improved to $402 million from $285 million last year. Moving to our sales and EPS outlook. The company expects consolidated net sales for the second quarter will range from $7 billion to $7.2 billion, based on a mid-single digit increase in comp store sales for the enterprise and for Dollar Tree and Family Dollar segments. Diluted EPS for the second quarter is expected to be in the range of $0.79 to $0.89. As a reminder, the bulk of our ocean freight savings for the year will fall in the second half, as previously mentioned. With respect to full year fiscal 2023 guidance, recall that fiscal 2023 has a 53rd week. Consolidated sales for the full fiscal year are now expected to range from $30 billion to $30.5 billion. The company expects to deliver a low to mid-single digit comparable store sales increase for the year, comprised of a low to mid-single digit increase in the Dollar Tree segment and a mid-single digit increase in the Family Dollar segment. Selling square footage is expected to grow by 3% to 3.5% for the year, with new store growth back-end weighted. While we modestly raised the midpoint of our top line guidance, we are incrementally more cautious on our margin outlook, given the growing industry-wide challenges of accelerating shrink, the unfavorable shift in sales mix and their impact on our near-term profitability. Since the beginning of the fiscal year, the impact of these 2 factors on our financial results has intensified. We expect that over time, our mix of discretionary will normalize and that we will also improve our performance on shrink through defensive merchandising efforts, real estate optimization and perhaps higher prices to compensate for areas of systematically higher shrink. We expect the combined and continuing full year earnings impact of unfavorable consumables mix and higher shrink is expected to be approximately $0.55 per share in 2023. Our modeling considerations for 2023 outlook include the following. We expect consolidated depreciation and amortization to range from $845 million to $850 million. Net interest expense is expected to be approximately $28 million in Q2 and $110 million for the year. Our outlook assumes a tax rate of 24.1% to 24.3% for the second quarter and 23.9% to 24.1% for fiscal 2023. While our share repurchases are not included in our outlook, we had $1.7 billion remaining under our share repurchase authorization as of April 29. Weighted average diluted share counts are assumed to be 221.4 million shares for Q2 and 221.6 million shares for the full year. For the balance of 2023, we will work diligently to offset potential margin pressures that could come from elevated levels of discretionary inventory. We are taking actions to mitigate the potential impact of these cost pressures such as further optimizing our promotional spending and vendor allowances, identifying opportunities to further reduce inbound freight costs and managing repairs and maintenance costs. We continue to see full year earnings benefit of $1 per share from lower ocean freight costs this year, which could be significantly weighted towards the back half of the year, and an additional $1 per share benefit in 2024 and beyond. As a result of the factors I just outlined, we are revising our diluted GAAP EPS outlook for fiscal 2023 to a range of $5.73 to $6.13, which includes the expected contribution from the 53rd week and the $0.12 legal reserve taken in Q1. I will now turn the call back over to Rick for closing remarks.
Richard Dreiling:
Thank you, Jeff. We are continuing to execute at a high level and acting with urgency around our business transformation, and I am pleased with our solid start to 2023. We are looking forward to our investor conference next month, where we expect to provide our investors and analysts with a multiyear outlook for the business, including a substantive and comprehensive overview of the key elements of our business. Our team has identified multiple levers to unlock value, and we have strong underlying business momentum that positions us favorably in the current retail and economic environment. We see a path to greater earnings power over the next 3 years and look forward to sharing our plans in more detail next month.
I also want to take this opportunity to welcome our new Supply Chain Officer, Mike Kindy. I have worked with Mike in previous organizations, and he is a proven subject matter expert and thought leader in supply chain and logistics. I am very confident that Mike will demonstrate continued success at Dollar Tree based on his past record. I also want to thank John Flanagan for his contributions, which helped us get to where we are today. While John communicated to us at the outset is desired to serve only for a short period, over the past year, john has led our supply chain strategy and has overseen the early stages of the process to optimize our distribution network and he's had a tremendous impact. We are moving at a fast pace in our journey to fundamentally reposition our combined retailing operations for sustainable long-term growth. Our efforts are already paying off in the form of significant market share gains at both segments. Both formats have a clear runway for accelerated growth in productivity and profitability. Our leaders have complete ownership over the factors that will shape our outlook for the next 3 to 5 years. We have a winning team of more than 200,000 associates who are highly motivated and eager to succeed. I look forward to sharing more next month at our conference. And one last note. Before we go to Q&A, I want to share some IR news with you. Several months ago, Randy Guiler communicated with us his retirement plans. This advanced notification provided us with ample opportunity to seek Randy's replacement. I want to thank Randy for his 9 years of dedicated service leading the IR function at Dollar Tree. I am pleased to share that [ Bob LaFleur ] joined Dollar Tree on Monday of this week as our new SVP of Investor Relations. Randy will be with us at our upcoming investor conference and is continuing in his current role with the company through the month of June to help facilitate a smooth transition. Please join me in congratulating Randy on his impending retirement, and Bob on his new role at Dollar Tree. Operator, Jeff and I are now ready to take questions.
Operator:
[Operator Instructions] We will take our first question from John Heinbockel from Guggenheim.
John Heinbockel:
So Rick, it's more of a strategic question, right? If I think about your initiatives and then the consumer, do you think that consumable penetration, right, that mix not only will remain elevated, maybe the consumables mix goes higher over time. What's your thought on that? And then mitigating the impact of mix on margin. Private label will help, but maybe talk about where do you think that goes and the opportunity to do sort of ultimately a DG Fresh like distribution initiative, right, to bring down COGS in that area.
Richard Dreiling:
Thank you, John. Great question. There's a lot of meat answering that question. The first thing I'd like to say is the strength that we are experiencing consumables has nothing to do with weakness in our discretionary. The fact that we are responding to the needs of the consumer, which is the shift towards consumables, is a really significant step forward for us and that we're introducing consumable products, especially on the Dollar Tree side, that the consumer is responding to.
Now when I talk about our discretionary, I think it's also important for everyone in this call to realize that our discretionary is a little bit different than what you'd see out in the marketplace. Our discretionary tends to be high-value items that you can compare to another operator, another retailer, and see a significant difference in the retail price point. So that's part of the reason I'm still very bullish on where we are with discretionary. Now as this shift continues, the advantage for us is twofold. Number one, private brands, and the amount of work that's being done on private brands. And what I'd like to say is not just on the consumable side. Our private brand effort includes HVAC or HBC and all of the higher-margin private label products. So that's another way for us to accelerate the margin on the consumable side. And let's not forget shrink, when you think about the pressure that we're experiencing, shrink tends to be cyclical. And what happens with shrink is we all work to mitigate it. If you can't, all costs that can't be taken out it passed on the consumer eventually. So we're keeping an eye on it. And I would say, John, again, as we talk about margin, the shrink issue, we have 4 classes of shrink stores, with 4 being the highest. The shrink impact is pretty uniform through all 4 classes which I've never seen that in my career, which is truly fascinating. So in regards to the fresh concept, right now, we are committed to frozen food and refrigerated, which is one of the highest growing categories with our particular consumer.
Operator:
We will take our next question from Simeon Gutman from Morgan Stanley.
Simeon Gutman:
I wanted to ask about Dollar Tree Plus, I also wanted to ask about the $1.25 price point at Dollar Tree. Can you talk about, I guess, the trade-off here of maybe accelerating a move to higher price points given some of the higher cost pressures, given some of the margin headwinds? Just the trade-off, given how the consumer is behaving and then maybe speeding up Dollar Tree Plus rollout to more stores?
Richard Dreiling:
Yes, 2 good questions there. We are very excited what we're seeing with Dollar Tree Plus, and our intent is to move that along as fast as we can. The same thing with the $3, $4, $5 frozen food. The change in the basket when those items goes in is significant.
The price point thing, Rick McNeely, our Chief Merchant, is actually experimenting with a couple more price points in certain stores, and there has been no consumer resistance. I think once we broke the dollar, I think that any backlash on that is behind us. And what Rick is doing, incrementally priced SKUs are not a repetition of what we already have. So we're creating a bigger basket and a broader shopping experience.
Jeffrey Davis:
If I could just add to that. One of the things that the merchant team is really focused on the whole situation is always making sure that they're giving more value in relation to the market at every price. And while some of our prices in relation to where we were previously embracing the dollar at a higher price point, continue to have that price separation and value separation against other competitors in the marketplace.
Operator:
We will take our next question from Edward Kelly from Wells Fargo.
Edward Kelly:
So first on shrink. Just quickly, could you just walk us through the surprise there? I would think that shrink would be tied to, like, a year in inventory count, so I'm just curious as to what happened there.
And then Rick, for you. Big picture, we all see the potential here and we hear you that nothing changes with all this. But the base that we're looking at as a starting point has been going down. And I'm sure you joined because you saw potential for significantly higher earnings than you're going to be at $6 this year. But I guess the question is the timing around the inflection. And you mentioned sort of 3 years, but like how quickly do you think we can begin to see that acceleration?
Jeffrey Davis:
This is Jeff. I'll take the first part of the question regarding shrink. When we gave our guidance for the year, we had approximately less than 10% of our stores have taken their inventories for the year. And while we did see some elevation in that shrink, that was embedded in our guidance for the year. As we move through the course of the quarter, we saw a pretty rapid increase in the level of shrink that was being experienced by the stores. And as Rick has said, we were seeing that across all strength classes, which was really out of the normal for us. That's the reason why we needed to make the adjustment.
So through this period of time, we only have a little less than 40% of our stores that have taken their inventories. We are anticipating that what we're seeing today could accelerate even further because we still have a number of our higher shrink class stores still left, and that's what's being reflected in the adjustment that we had for the year. But based upon what we know today, based upon some other leading indicators, we believe that the adjustment we make is most appropriate. This is not unlike what you're seeing in many other retailers across the industry. Some of this is societal, some of it is economic, some of it, of course, is particular to us. And we're taking all the appropriate steps that we can to control and mitigate this where we can.
Richard Dreiling:
Then, Ed, on the second part of your question, the first thing I'd like to say is we intend to highlight a lot of that question at the Investor Day, which will give you a little more clarity to how it's going to shake down and how quick it's going to come.
A couple of comments, though, prior to that. Number one, I am very bullish on the opportunity here. And I do think if we are realistic, this consumable shift and the shrink impact are transitory. I do not believe we're going to be living with them forever, and that is all accretive to what we're doing. And then you throw in -- and all of this, Ed, is in motion now, the move to the [ 78-inch ] profile. We're going to add almost 1,000 new SKUs. The work on Dollar Tree Plus, the expanded coolers, the expanded frozen food, the improvement in the physical store facilities. We're reducing our turnover. There's already proof of that by the wage investments we've made, which is going to help us in so many other areas. So what I'd like to say, there's a lot in motion, I am incredibly confident and optimistic, and we'll lay this out for you in more detail at the Investor Day.
Operator:
We will take our next question from Scot Ciccarelli from Truist Securities.
Scot Ciccarelli:
Scot Ciccarelli. A lot of your initiatives like expanding cooler doors and frozen foods have been focused on driving consumable sales, and that's obviously the driver to the transaction growth, as you've highlighted. But Rick, like as the consumer behavior starts to stabilize, how do you shift consumers back to buying more discretionary goods? Because in theory, your consumable sales gain should be sustainable. And if we look at Dollar General as an example, like their consumable sales spiked during the great recession, but then consumables continue to become a bigger part of their sales pie every year up until the pandemic. So like, how do you actually change that trend once the consumer starts to normalize?
Richard Dreiling:
Another great question. And I would say this, and no offense to anybody prior to me. Somewhere along the line, we have confused value and cheap. Our consumer is looking for value, and value means that -- it's the classic story I can remember years ago, people -- somebody bought a rake in one of our stores, took it home, used it 1 day and it was broken. Well, that was cheap, but that's not value. And how we are going to manage this, we're doing a better job of procuring products and bringing the right selection in.
The people at Dollar Tree are making their first trip to China in over 3 years, and we're really excited. Now, they'll be able to stand face-to-face with the manufacturer and the vendor and be able to see and hold and feel what they're going to bring into the store. And then the other thing, Scot, to be frank, the consumer is going to make that choice. If we have the right products, the right selection and we promote value, the consumer is going to gravitate there anyway.
Operator:
We will take our next question from Peter Keith from Piper Sandler.
Peter Keith:
So the transaction comps are pretty impressive and nice to see. I'm curious with the economic backdrop, what type of trade-in/track-down benefit you're seeing? Obviously, you're getting more customers in stores. Is this repeat behavior? Or are you starting to see new customers that you can track behavior on?
Richard Dreiling:
We're actually seeing new customers. Our core customer is coming more frequently. Now when they come, they don't spend any more, but they come more often. And what we're now seeing is the trade down in that $80,000 income range, and we're actually beginning to target that consumer, and that consumer is more wrapped up in the consumable business.
And one of the things that Jeff highlighted, I hope that everybody caught was the improvement in our service level to the stores, which is significant. And that service level improvement is become -- comes from giving the stores what they want when they order it, and they're drawing consumables at a much higher rate down. And then what happens, when that higher income consumer comes in, they're used to a certain in-stock level, and we're now able to do a better job of satisfying that, which is why we're seeing that trade down.
Jeffrey Davis:
And Peter, just to give you a little more dimensionalization. Across both banners, they are averaging about $3 million net new customers over a trailing 12-month period. So you are seeing that customer -- a new customer coming to us. We're seeing that customer shop across the entire store across consumables and discretionary. And as Rick has mentioned, our ability to make sure that we have the right store environment such that they want to come back is an important element for us. That's the reason why we want to continue improving our store standards and delivery and service to those stores.
Operator:
We will take our next question from Karen Short from Credit Suisse.
Karen Short:
Look forward to seeing you in a few weeks. I just wanted to ask a couple of things. So on overall margin structure within the Dollar Tree banner, so is it fair to say as we get through the year, you'll have more benefit from freight? So what we're looking at right now is not necessarily the run rate, but there is a mix shift and then that will be offset a little more impactfully in the second half of the year on freight.
But then the second bigger thing I wanted to ask is I know you're doing a test on consolidating a distribution center and wondering if you could give some updates on that as it relates to what that could look like as a much bigger rollout as we go forward.
Richard Dreiling:
I'll take the second.
Jeffrey Davis:
Yes. So on the first portion of the question with respect to margins at Dollar Tree, we had stated earlier that our expectation is we'd be able to manage that business over the course of the year to a 36% to 37% gross margin rate. And there's lots that goes into that, of course, not only product costs but shrink markdowns on some other elements.
Today, as we look in our guidance, I would say that we would be at the lower end of that range, but we feel comfortable that we will be able to continue managing the business based upon our product offering and how the customer behaviors have been in that 36%, 37% range, so at the lower end of that. There's just a number of elements we believe that we still have to work to from a product offering basis as we look at the introduction of new price points and able to capture a little more margin where previously we weren't able to do so at some of the lower price points.
Richard Dreiling:
Then in regards to the question concerning combined warehouses, we're opening on the process of building one in Florida. We had one in Utah, and we actually converted it to Family Dollar only. It's one of those propositions that sounds easy, makes sense but it tends to be a little more difficult to execute. And what John and Mike have done for us is we've have done -- and which we'll share at the Investor Day, we've done a total analysis of the system. And at the end of the day, this really boils down to stem miles and how far away the distribution center is from the stores.
And I have no opinion, I'm not sold that we need to do it, but I'm not sold that we don't need to do it. But we need to spend a little more time with it. And we're going to give you our thoughts on a more broader base at the investor conference. And then we'll probably have an answer in the next 6 or 7 months where we would go ultimately on a combined warehouse.
Operator:
We will take our next question from Matthew Boss.
Matthew Boss:
So Rick, at the Dollar Tree banner, could you speak to the economy that you're seeing between the traffic improvement, which obviously is a nice positive, relative to the average ticket decline that you're experiencing? And then just what are you seeing with recent trends to support the sequential comp acceleration that you embedded in your second quarter guidance at the Dollar Tree banner?
Richard Dreiling:
Yes. I don't want to give a mid-quarter guidance here. It's we're only 3 weeks -- 3.5 weeks into the quarter. But I will tell you, I am very pleased with the trends and the transaction counts have not changed.
I -- Matt, when I look at this, we always want to look at the basket, and I've always believed that footsteps ultimately drive the basket. And I am very pleased with what we're seeing with transactions, and I think the transaction growth we have is leading to the comp sales that we're driving at Dollar Tree. So I remain very, very bullish on both banners at this stage of the game.
Operator:
We will take our next question from Joe Feldman.
Joseph Feldman:
I guess I wanted to go back on the consumables mix, I guess, we all kind of understand the environment we're in. And I guess I'm a little curious as to what was different in the quarter than you expected. It seems like it did accelerate the mix pressure. And you also made reference to an earlier question that you were still -- the discretionary business sounded like it wasn't that bad from your perspective. And I wanted a little more color on performance of discretionary, I guess, if you could share it?
Richard Dreiling:
Yes. Maybe we'll tag team that, if that's okay, and I'll start.
Jeffrey Davis:
Yes, yes.
Richard Dreiling:
If you go back to the last earnings call, we did call out that we were starting to see a shift in shrink and the drive towards consumables. Now there's absolutely no doubt over the last 12, 15 weeks that call out has accelerated. And I think the consumer is feeling the real pressure now of a lot of things that have taken place. We've had change in SNAP benefits, tax returns are smaller than this time last year, all the stimulus is out of the system, and all of that is taking root. And the consumer now is more focused on needs and buying to those needs as close as they can versus wants, and that's the shift we've seen. Now we think that shift is going to continue for a while. We don't particularly believe it's going to get any worse. I can't remember the second part of the question.
Joseph Feldman:
I was just asking discretionary. Yes.
Richard Dreiling:
Yes. The reason I bring up discretionary, I think it's really important. Really important. Our discretionary business is still good, and the fact is we've strengthened the consumables side. So we shouldn't be making the assumption that our low-cost pertinent discretionary items are no longer wanted or needed by the customer. It's that they're buying more consumables.
Jeffrey, I don't know if you have anything to add?
Jeffrey Davis:
Yes. I was just going to add a little -- provide a little dimension on the acceleration of consumables.
So in the fourth quarter, you may recall that for Dollar Tree, on a year-over-year basis, they were flat in their mix, and Family Dollar was about 120 basis point shift into consumables. If you fast forward to the first quarter of this year, Dollar Tree is now 180 basis points shift into consumables and Family Dollar was 200 basis points, so you saw a pretty significant, on a year-over-year basis, shift more into the consumables. And that's what our financials have reflected, but that should hopefully give you a indication of just the quantum of what that shift is. And if you think on a margin basis, what that does for you is that there's about a full 20-point differential in your gross and your initial margins between discretionary and consumables. So when that dollar shifts from discretionary into consumables on average, you're losing 20 points of initial margin.
Operator:
We will take our next question from Michael Lasser from UBS.
Michael Lasser:
One of the hallmarks of your and your team tenure in the previous retail situation is that you would consistently underpromise and overdeliver and generate consistent and reliable performance. This experience has been colored by surprises due to factors like reinvestment and unanticipated costs such as shrink and mix. At what point do you think Dollar Tree is going to get into the cycle of greater consistency? Is it realistic that, that could happen in the second half of this year?
Also, as part of this question, I'm going to put in a second one. The market was focused on Dollar Tree's ability to earn $8 in '24 and potentially $10 in '25. Given these factors that you've outlined today, is it realistic that the market should push off those expectations in light of everything you know? And then lastly, you've alluded to this incremental price points above $1.25, presumably, that's above $1.25, but below $3. Can you give us more detail on that? It sparked a lot of interest so far this morning.
Richard Dreiling:
So I'll take the first part, let Jeff handle the second. Underpromise, overdeliver, I think, has been the mantra of my career, and I cannot deny that. But I will make a couple of comments.
Number one, when we started the journey at my previous employer, we were priced. We did not do it in the public arena. And what you're seeing is a lot of the maturations we went through a long, long time ago. I do believe we are on the right path. I do believe all the things we're doing are right, and I do believe there's a payoff coming. And what we will do at the Investor Day is we're going to show you that map. And what I'd like to do is hold on until that time, Michael. So I can -- so we can stand up there with charts and graphs and show you the journey. But I think we are getting this level set now. Every day, we find something new we didn't know about, and we're going to have to go out and get it fixed. And this is a journey, and I've got the right people around me. I've got 200,000 people that are excited, that are dying to be led. And we just need a little bit of time, and we're going to lay it all out for you in about 4 weeks. Jeffrey, I'll let you handle that.
Jeffrey Davis:
The only thing I would add to that is that we are very confident that we will be able to deliver double-digit EPS. And the actions to get there, we are embarked upon currently. As Rick has said, we are confident in what we're doing. You're starting to see some of the results from a top line perspective. The components of how we get there and the time frame that we get there would be best illustrated when we get to the Investor Day, and we don't want to take anything away from that period of time. But we are confident the double-digit EPS is in our near-term horizon.
Michael Lasser:
I think on the price point, [indiscernible]?
Richard Dreiling:
Multi-price.
Jeffrey Davis:
I'm sorry. The specific question on multi-price?
Richard Dreiling:
Yes. Could you say it again, sir?
Michael Lasser:
Yes. So you have alluded to testing several times on this call, incremental price point. The interpretation is that those are above $1.25, but below the Dollar Tree Plus price point of $3 and $5 items. So if you could elaborate on that test, it will be super helpful.
Richard Dreiling:
Yes. To answer your question, at this stage of the game, north of $1.25 and less than $5. That is a correct assumption. That doesn't mean that's where we're going to land when this is all said and done. But yes, we are -- that was -- that's very fair, between $1.25 and $5 is where we're at right now with no duplication of the SKU.
Operator:
We will take our next question from Krisztina Katai from Deutsche Bank.
Krisztina Katai:
Just wanted to quickly follow up on some of the increased pressure points on margins. Could you just talk about how you see the promotional environment evolve from here? And I know you said that currently, it's still very rational. But in case some of the larger players do pick up price investments, can you just talk about how much you can potentially lean on to your vendors, better source? And I think, Rick, you said that you view shrink as something that is cyclical. But can you just talk about some of the steps that you can take right now to mitigate it?
Richard Dreiling:
Yes. I'll talk about the promotional environment. I'll reinforce that it's very stable right now. And I will also tell you this, we are generating, on the Family Dollar side, vendor relationships we have not had in a very, very long time in this banner. And those vendor relationships are driven by our ability to execute on the commitments we make to the vendor and the manufacturer. And it is -- and that's how you get the incremental support for incremental markdowns in case you have to go to battle in print.
However, I do not see that. I think the market is as rational as I have ever seen. Anything you want to take, Jeff?
Jeffrey Davis:
Yes. On shrink, it's a multifaceted sort of approach. You definitely start off with a sense of merchandising, where there's opportunities for us in some situations to how you display items, what restrictions you have and how that banner is displayed. And those are the types of things that we don't particularly care for because we know that, that impacts sales, but it's an inevitable portion. We introduced new technologies within the store, how we monitor and alerts. We take such steps quite honestly in working more closely with local law enforcement to the extent that there is elevated levels with systemic communities.
But also, as we have been really focused on our turnover and getting certain key positions filled and continue to be in position, that also helps us from a turnover perspective, which is -- also helps afford some of the internal elements of our shrink. So once again, very multifaceted, and we will work all across that. In the eventuality that this is something that we -- is at elevated levels, and we're going to have to pass some element of this on to our consumer, we'll ultimately have to think about how we will price this into some of our merchandise.
Richard Dreiling:
Krisztina, I'd add one last thing, too. Shrink tends to fall into certain categories. And in our higher shrink stores we're actually exploring, do we need the same assortment as a low shrink category store? So those are the kinds of things we're looking forward. To Jeff's point, we're looking at everything right now to mitigate the problem.
Operator:
Now, I will hand over back to Randy Guiler. Please go ahead, sir.
Randy Guiler:
Thank you for joining us today, and we hope to see you at our investor conference on June 21. Have a good day.
Operator:
Thank you for joining today's call. You may now disconnect.
Operator:
Good morning, and welcome to the Dollar Tree Fourth Quarter Earnings Call. This meeting is being recorded. At this time, I would like to hand the call over to Randy Guiler. Please go ahead, sir.
Randy Guiler:
Thank you, operator. Good morning, and welcome to our call to discuss Dollar Tree's Fourth Quarter and Fiscal 2022 results. With me on today's call are Chairman and CEO, Rick Dreiling; and CFO, Jeff Davis.
Before we begin, I would like to remind everyone that various remarks that we will make about our 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. These statements are subject to risks and uncertainties, and our actual results may differ materially from those indicated in these forward-looking statements. For information on the risks and uncertainties that could affect our actual results, please see the risk factors, business and Management's Discussion and Analysis of Financial Condition and Results of Operations sections in our 10-K filed March 15, 2022, our 10-Q for the most recently ended fiscal quarter. Today's press release and 8-K and other filings we make from time to time with the Securities and Exchange Commission. We caution against reliance on these forward-looking statements made today, and we disclaim any obligation to update or revise these statements, except as may be required by law. Following our prepared remarks, Rick and Jeff will take your questions. Given the large number of those that would like to participate, I ask that you limit your questions to one. I will now turn the call over to Rick.
Richard Dreiling:
Thank you, Randy, and good morning, everyone. I apologize that I'm a little horse. I'm coming off of COVID and the good news is I'm fine. I will review the highlights for quarter 4 fiscal 2022 and will provide an update on current priorities. Then Jeff will detail our financial performance and expectations for 2023.
For the quarter, we delivered $7.72 billion in sales, an increase of 9%, with enterprise comp growth of 7.4%, operating income of $618.1 million, leading to a quarter 4 EPS of $2.04. Our sales performance for the fourth quarter was a continuation of momentum from quarter 3. Same-store sales growth of 8.7% at Dollar Tree and 5.8% at Family Dollar represented comp accelerations on a 1-, 2- and 3-year stack basis. This improved performance and market share gain is not simply happening by itself. It's the result of lots of hard work and good work by our store and merchant teams as well as the early fruits of our price, labor and store investments. And I truly believe we are just getting started. I have been in retailing for half a century. And I've been fortunate to play a leadership role in multiple transformations. I am incredibly excited by and energized to be part of the path ahead for Dollar Tree. We have an exceptional team assembled, and I cannot overstate the amount of positive transformational change occurring in this business. We are committed to enhancing store productivity as we focus on developing our people, tools and technology to fuel accelerated growth. And that we do this while simplifying operations, improving the supply chain and innovating our merchandising strategies to better support our associates and to better serve our shoppers. Given the team's relevant prior experiences, we know exactly what to do to drive improved productivity and profitability. We are moving as quickly as possible to capture the full potential of this business, and I am confident we will succeed. We have tremendous opportunity to improve the Dollar Tree banner. At Family Dollar, it's clear that we are at least a decade behind, and this is reflected in our prior performance levels and financial results. As we narrow the gap operationally, it will be realized in material improvements to our financial performance. As we get settled in, we are finding more and more opportunities to meaningfully improve both banners. Compared to just a few short months ago, the list of improvement opportunities has grown. Our guiding objective is to maximize returns to our shareholders. Doing so calls for implementing these initiatives with responsible urgency. There is no point in dialing. It has, over the months, become increasingly clear that our team's great experience gives us the opportunity to complete in just 3 to 5 years, most of what has taken far longer in other situations. Our merchants, stores and other teams are driving lots of initiatives, many of them with minimal investment. I will highlight some of these later. While these are already gaining traction, they will have the greatest impact, if supported by additional complementary investments. The stronger our associate team, the better the store conditions the more competitive our pricing, the more we will get out of them. There is a synergy across these initiatives and the complementary investments we are making with each enhancing the others. For this reason, we are accelerating and pulling forward our schedule of major high-returning investments. The cost of these investments is reflected in our 2023 outlook, as an incremental $430 million increase in SG&A, and the outlook assumes only a minimal return from these investments. The company is confident that these investments once implemented, will yield attractive returns in 2024 and beyond. While we are confident these operating expense investments will yield strong returns, we are also aware of the dynamic nature of the earliest stages of a turnaround. The many simultaneous moving pieces, the interdependence of many of these pieces and in current unusual dynamics in the economy. These considerations make forecasting the quarterly cadence of the benefits from these investments, particularly challenging. For this reason, for this first year of our transformation, we will consider these benefits only as they, in fact, materialize. This year's investments, which include the full year impact of investments made during fiscal 2022 are in several key areas in the following order of magnitude, labor and wages, including hourly wage rates and investments in field personnel, stores, through repairs and maintenance and improving store conditions, corporate, including technology and other initiatives. Under this new leadership team, we are increasing average hourly wages and estimated $2 for the 2-year period of 2022 and 2023. We feel that looking on a market-by-market basis and benchmarking to comparable retail wages, this investment will put us in a more competitive position. We also made additional investments in store hours and coverage, investments in our field labor and managers and other areas to help us execute much better. We expect these labor and wage investments will drive improved execution in our stores, higher sales, lower turnover, attraction of and retention of talent, reduce shrink and greater productivity and efficiency. Our associates and field personnel are critical to our transformation journey and we are excited about the investments in our talent. We are looking to invigorate the culture of this business, give our local operators and associates, the tools they need to execute and importantly provide them the opportunities they deserve to grow within our company. On store standards, we call last quarter, I spoke about an intense focus on store standards, our commitments to clean them up, straighten them up and fill them up. When we do this, our shoppers respond with a bigger basket and more importantly, with repeat visits. Our new COO, Mike Creedon, joined the team in October. Mike possesses a relentless focus on the 3 pillars of successful store operations, the work, the worker and the workplace. The work we must run efficient and productive stores. As a high transaction volume business, it's critical we have processes in place to get product onto our shelves quickly. I'm certain that we can't sell a product if it's in the back room. Approving efficiencies and workflows positively impacts our associate experience. The worker, as an organization must be a cornerstone that we support and enable our associates to be successful. This commitment will enhance our ability to recruit, hire, train and retain associates and contribute to their retail career development. We believe this focus, combined with our wage investments are contributing to the reduction in turnover that we are starting to see. The workplace and as we have indicated in the past, we must improve our store and DC conditions, and we are in the process of doing so. Frankly, stores and DCs were not being maintained up to our new leadership standards. We are actively transitioning from what we consider to be reactive to proactive maintenance approach. In addition to the work, the worker and the workplace, Mike's team are in the process of identifying certified GOLD stores for each region. GOLD stands for a Grand Opening Look Daily. These stores will serve as a clear, concise example for our district and store leadership teams across all regions so they have a distinct vision and understanding of what our most successful and well-run stores look like. On the question of our corporate investments, I will address these later in the call. Our merchandising teams led by Rick McNeely and [ Lara Gada ] are working hard. The Dollar Tree merchant team successfully managed through the transition to the $1.25 primary price point. As we cycle the majority of these stores throughout the fourth quarter, we saw a 410 basis point sequential improvement in traffic compared to quarter 3. Now that we have anniversaried the remainder of our stores in February, traffic is positive, and we are confident it will be a contributor to positive comps at Dollar Tree throughout the year. In 2022, we added $3 and $5 plus merchandise into more than 1,800 Dollar Tree stores. We plan to add this multiple price point product in another 1,800 or more stores in 2023. And when we begin flowing this multiple price product through 3 additional distribution centers, bringing our total to 7. Separately, we have been aggressively expanding our $3, $4, $5 frozen and refrigerated product across the Dollar Tree store base going from 0 to 3,500 stores in 2022. This consists of 3 cooler doors, 1 at each price point with an attractive selection of proteins, pizza, ice cream and more, which the customers are responding positively to. What we are seeing with Dollar Tree plus and multiple price frozen is that when the customer purchased at least one of these items, the basket size is more than double the basket with no multi-priced items. We are experiencing a more consistent and predictable slide chain. Stores were set well in advance for Valentine's Day, and we had terrific sell-through. The stores are now well prepared for the Easter season. And with $1.25 transition now behind us, we believe it's time for Dollar Tree merchants to get more creative than ever before. They have [ carved launch] to raise the bar on delighting customers and driving sales and all options are up for discussion. We believe doing what is easy has no reward.
In addition to the opportunities at the Dollar Tree banner, we have a tremendous long-term opportunity to improve the operating performance at Family Dollar. We have a number of sales and margin-driving initiatives that are already underway, albeit in the early stages. But as you have seen, these have contributed to the 4.1% comp in quarter 3, followed by a 5.8% in quarter 4. Among our actions are the following:
we have begun raising the shelf height to a 70-inch profile throughout the stores to enable us to broaden the product offering for our shoppers. This profit-enhancing initiative allows us to grow our SKU base by 1,000 items, including OTC and [HBA], without increasing our store-related costs.
We are continuing to expand the number of cooler doors with plans to add 16,000 doors in 2023 to accommodate more frozen and refrigerated items. Our goal is to have 30 doors per store. Our shoppers rely on Family Dollar in their communities to provide these consumable base products to feed their families. We are replacing our control brands with private brands, and we will be introducing hundreds of national brand equivalent products in the back half of this year. These will include new labels and redefined labels, many of which are being developed in our new test kitchen here in Chesapeake, Virginia. To better meet both store and shopper needs, we are improving our ability to ship in [ ECS ], which improves inventory flow and profitability on slower moving, higher-margin items including the over-the-counter and health and beauty products. This enables us to be more nimble and provides greater flexibility. Additionally, we are working on improving Family Dollar productivity by enhancing end-cap displays, eliminating flex space and refining store adjacencies to better optimize the box. These are just a few examples that Larry's teams are focused on that we believe will contribute to Family Dollars improved sales trajectory in the sales ahead. We continue to be pleased with our positioning from a price perspective. We are at parity with key competitors and have widened the gap to grocery and drug. Shoppers have responded to the sharp pricing actions we took in late quarter 2 and third-party data suggest that Family Dollar is seeing an increasing amount of new customers in our stores. I will now turn the mic over to Jeff Davis, while Jeff has just been in his CFO seat at Dollar Tree since October, he is peddling fast and making great progress in a number of key strategic initiatives including leading the development of our long-term financial plan. Jeff will now provide more color on quarter 4 and what's ahead of us.
Jeffrey Davis:
Thank you, Rick, and good morning, everyone. Unless otherwise stated, all fourth quarter comparisons are against the same period a year ago. In addition to my comments today, a supplemental slide deck that outlines several of our key operating metrics is available on our Investor Relations website.
Operating income increased 6.8% to $618.1 million or 8% of total revenue a 20 basis point decline in operating margin. This was compared to a 70 basis point improvement in gross profit margin, which was more than offset by SG&A. Gross profit increased 11.6% to $2.39 billion. The Dollar Tree segment gross margin improved 110 basis points, primarily from higher initial mark-on, lower freight cost and sales leverage, partially offset by product mix, product cost inflation and higher costs for markdowns, shrink and distribution. Family Dollar's gross margin increased 20 basis points. This quarter represented Family Dollar's first improvement in gross margin in the last 7 quarters. The improvement was driven by higher initial mark-on, lower freight cost and leverage on occupancy, partially offset by mix, markdowns, shrink and higher distribution costs. SG&A as a percentage of revenue increased 80 basis points to 22.9%. The increase is due to a $23.9 million noncash store impairment charge along with elevated repairs and maintenance as part of our commitment to improve store and DC standards. Investments in store and distribution center hourly wages, and inflationary costs across several expense categories. Corporate support and other expenses were consistent at 1.4% of revenue. Net income was $452.2 million, and EPS was $2.04 in comparison to $2.01 a year ago. Moving to the balance sheet. My comments will reflect balanced comparisons at the end of Q4 2022 versus Q4 2021. Combined cash and cash equivalents totaled $643 million compared to $985 million. Inventory increased 24.8%, primarily from unit growth associated with early receipts of spring 2023 merchandise, Family Dollar combo expansion and new store unit growth and cost growth from product inflation, including freight, the expansion of the $1.25 and multi-price plus inventory. Units per store are at a similar level to pre-pandemic period. Our inventory is fresh, and we have limited dated inventory well within manageable levels. Capital expenditures were $328 million, in the fourth quarter versus $271.6 million. For fiscal 2023, we expect capital expenditures to total approximately $2 billion. Of this $2 billion, we would characterize 39% is dedicated to business continuity with the remaining 61% for what we consider to be growth optimization and productivity improvement. The business continuity includes projects to run and operate our stores and DCs as well as enhanced safety and compliance programs. More specifically, this would include freezers and coolers, HVAC replacements and facility improvements for stores. DC conveyor projects and building improvements for our distribution facilities, enhance permanent cooling for our DCs and store safety and asset protection related projects. Our growth optimization and productivity improvement projects will include approximately 650 new stores, an estimated 1,000 store renovations, numerous distribution center projects and technology projects to enhance our efficiencies and support our growth. Our 2023 sales and EPS expectations incorporate a number of factors. First, this is a 53-week year. We expect this will benefit the fourth quarter by approximately $500 million in sales and $0.29 in diluted EPS. Second, we are cycling the outsized margin benefit for Dollar Tree's initial transition to the $1.25 price point where last year, it produced a 39% margin rate in the first half of 2022 as we evolved our assortments to the new price point. Also for both segments, we expect to see continued cost pressure from inflation and margin pressure from merchandise mix as consumables are expected to outpace discretionary sales. Third, our outlook includes a benefit of approximately $1 per share from reduced freight expenses with nearly all of that benefit realized in the second half. Approximately half of our fiscal 2023 import container volume will remain at existing long-term contracts or charters at elevated rates. We anticipate meaningfully lower rates for renegotiated contracts and spot volumes, which we expect to impact the remaining half of our container volume for the year. These factors limit the impact of lower freight rates on operating profits within the year. The Dollar Tree segment will realize approximately 80% of these freight savings, which will support a gross margin rate in the range of 36% to 37% in fiscal 2023. If current market conditions persist, we expect an additional freight cost relief of approximately $1 in fiscal 2024 and 2025 with the majority realized in fiscal 2024. Four, our outlook includes approximately $430 million or $1.45 per share in operating expenses across labor and wages, store repairs and maintenance and corporate as we accelerate our investments to transform this company. These investments are roughly split evenly between the 2 banners and include investments in corporate. Given the amount of transformational activity, initiative interdependencies and the volatility of economic environment, it is difficult to precisely estimate the timing and related magnitude of investment returns. Our 2023 outlook assumes only a minimal benefit from these investments. Company is confident that these investments, once implemented, will yield attractive returns in 2024 and beyond. There is strong evidence in the back half of 2022 that management's actions and investments are already yielding results at Family Dollar and Dollar Tree as evidenced by our recent trends. While our outlook assumes minimal profit contribution from Family Dollar this year, we believe there is tremendous opportunity to improve Family Dollar sales productivity and margins and we are confident this opportunity will realize and produce meaningful profits in the years ahead. Finally, we will continue to focus on people, store conditions, tools and technology to drive growth and long-term operating performance improvements. We expect SG&A expense dollars, which includes general inflation, new store expenses and accelerated investments as well as the 53rd week to grow in the low teens. Based on the confluence of these factors, we anticipate year-over-year gross and operating margins will decline in the first half of 2023, followed by growth in the second half. We estimate 2023 EPS will be comprised of approximately 40% in the first half and approximately 60% in the second half which includes 1 extra week in Q4. Consolidated net sales for the full year fiscal 2023 are expected to range from $29.9 billion to $30.5 billion. We expect a low to mid-single-digit comp store sales increase for the year, comprised of a low single-digit increase in the Dollar Tree segment and a mid-single-digit increase in the Family Dollar segment. Selling square footage is expected to grow from 3% to 3.5%. Our new store openings this year will be more back end weighted compared to 2022. Diluted EPS is expected to range between $6.30 and $6.80. For Q1, we forecast consolidated net sales will range from $2.7 billion (sic) [ $7.2 billion ] to $7.4 billion based on a mid-single-digit increase in same-store sales for the enterprise. Diluted earnings per share for Q1 are estimated to be in the range of $1.46 to $1.56. While share repurchases are not included in the outlook, we had $1.85 billion remaining under our share repurchase authorization as of January 28.
Other modeling considerations for the 2023 outlook include the following:
we expect consolidated depreciation and amortization to range from $845 million to $850 million. Net interest expense is expected to be approximately $27 million in Q1 and $97 million for the year. Our outlook assumes a tax rate of 24.25% to 24.5% for the first quarter and for the fiscal 2023 period. Weighted average diluted share counts are assumed to be 222.4 million shares for Q1 and 222.6 million shares for the full year.
I'll now turn the call back to Rick.
Richard Dreiling:
Thank you, Jeff. As an organization, we are moving fast. Our operating initiatives are in flight and are gaining steam and the current economic climate is driving more higher income consumers into value retail. We believe we are in the right spot to deliver quality, value and convenience that shoppers need today. The momentum is continuing as both segments are off to a nice start early in quarter 1.
Before we move to Q&A, I want to briefly discuss 2 additional contributors to our future success. Information technology and supply chain. In order to unlock the value creation opportunity ahead of us, we must have the right tools and technology in place to support our accelerated growth. [ Bobby Aflatooni's ] Technology Group has a clear vision and they are prioritizing projects that will have the greatest impact on our enhanced performance. Some of the increased speed fueling these projects, our capital expenditures and some are operating expenses. All of the projected spend for this year is captured and included in our outlook. And John Flanagan's supply chain team is doing a great deal of work to enhance efficiency and ensure the stores have the merchandise they need and can upstock it easily. We have identified an approach for eliminating the inefficiency of our current manual case-by-case handling process. This should enable us to more efficiently and reliably get products from our DCs onto our trucks and then into our stores. John has committed to having at least 1 DC up and running on the new process by the end of the year, which much more to come in 2024 and beyond. This will be a big step forward for our organization and especially for our store associates. Also, I would like to pat our DC teams on the back. In the past year, all 25 of our DCs have been good distribution practices certified by an independent third-party auditor, and we are already in the process to begin recertifying for 2023. The company is very proud of this achievement and believe it demonstrates our company's commitment to our associates to run good clean buildings. 2022 represented a year of substantial change for the Dollar Tree organization. Of the 16 officers listed on Dollar Tree's website, only 2 were with our company 15 months ago. That is clearly a great deal of change in a very short period of time. I would like to share my sincere gratitude to our 207,000 associates that have not only embraced change but have welcomed our new leaders and me to the organization. One day, we will be able to reflect on 2022 as the inflection point that got our company back on track. To capture the remarkable long-term value creation journey ahead of us. The team knows that I'm all in, in my commitment to support our store and field associates as they develop and grow in their retail careers by running full, clean and friendly stores to serve our shoppers each and every day. The long-term opportunity ahead of us is bigger than I imagined before I joined the Dollar Tree team. I want to be very clear. This transformation is not about saving dollars to deliver success. It's about spending dollars in the right places to unlock the future value of the business. This transformation is a process, which includes stabilizing the organization as we run and operate our business and make investments to modernize and transform the company to create long-term value for our stakeholders. As Jeff outlined, we pulled forward into 2023, certain investments that could otherwise have been extended for several years. And consequently, we expect fiscal 2023 to be a step back in earnings from the prior year. We're excited about this acceleration of initiatives and investments as it means higher and earlier returns in the years ahead. This is an important year to put us on a path for an acceleration in growth and earnings as we move forward. We believe that this approach will maximize returns for our shareholders. Our leaders are eager to share more details on our vision and the path to get there, and we will do so in a more structured format in our Investor Day here in Southeast Virginia, currently being planned for June. We intend for this to be the first of several events over the years ahead as we outline our transformation and its progress along the way. Before I turn it over to questions, I would like to take a moment on behalf of the employees, Board, shareholders to extend our thanks to Mike Witynski for his years of service and contributions. Mike, we're all grateful to you and wish you the best. Operator, Jeff and I are now ready to take questions.
Operator:
[Operator Instructions] First question comes from Matthew Boss from JPMorgan.
Matthew Boss:
Great. Appreciate all the color, and I hope you're feeling better, Rick.
Richard Dreiling:
Thank you, Matt.
Matthew Boss:
So maybe to kick off at Dollar Tree, can you elaborate on the sequential improvement in comps that you're seeing in stores that have now lapped the break the dollar, maybe larger picture, how best to think about opportunities for that concept going forward. Relative to before the decision to break the buck? And then just separately, can you touch on success of the $3 and $5 item introduction?
Richard Dreiling:
Yes. The answer, Matt, is let's do the last 1 first, the $3 to $5. We're very pleased. And the key takeaway on that is not only selling the product but the store's ability to manage it the multiple price points and not create confusion for the customer, which is why we've taken the approach that everything is now on the table. So very pleased with that.
The improvement, as I look at the improvement, it's not only the sales, but more importantly, the transaction count and what's going on in the basket. And we know that the basket is substantially larger when we get the multiple price points in it. So very -- we're pleased. We're excited. And now that we've cycled it, we're getting a true measure on what's going on.
Matthew Boss:
Yes. No, no, no, absolutely. And then maybe just to switch gears over to Family Dollar. So with mid-single-digit comps now for the second straight quarter, could you just elaborate on the market share gains that you're seeing with the acceleration of the investments. I guess what I'm trying to get to is, is there any visibility that you can share for multiyear return? And any change in the high single-digit long-term operating margin opportunity at Family Dollar?
Richard Dreiling:
We'll spend a lot more time talking about that sort of thing at the Investor Day. And while I do not want to be specific, Family Dollar is starting to gain share. And it's also gaining a larger share of the wallet.
Operator:
And our next question comes from Scot Ciccarelli from Trust Securities.
Scot Ciccarelli:
Good to hear you. I guess a little bit of a follow-up on that second question, which is, I think we all kind of understand the need to accelerate investment in the business. But Rick, you made a comment earlier in your remarks about you plan to achieve in 3 to 5 years, what usually takes a lot longer. So I guess the question is, should we view kind of '23 as a reset or starting point for growth in '24 and beyond? Or just given that list of growing projects you mentioned, could we see investment spending continue to pressure earnings growth in '24 and '25?
Richard Dreiling:
Excellent question. I would look at '23 as kind of getting us level set -- and I think the investments we will utilize in '24 and '25 will be more basic. You're always investing in the business, but it won't be anything of the magnitude that we're tackling now.
Scot Ciccarelli:
Got it. And then the second question is just in a lot of retail turnarounds in the past, there's a natural limit to how much change a new management team can induce in a short period of time. Do you think that could be a challenge as you've kind of settled in at the Dollar Tree, Family Dollar operation at this point, Rick?
Richard Dreiling:
Another great question. The more time I spend here, I'll make a couple of observations for you, Scot. It's becoming really clear to me the composition of the new team married with the older team, there's a tremendous amount of experience here. And we believe that experience is going to help us drive -- to drive to get things done faster. Then you couple that with an organization the Family Dollar and Dollar Tree organization. I have never seen the willingness to accept change like I'm seeing here.
The 207,000 people in this company are dying to be high performers, and they believe in what we're doing. And they're seeing -- are the investments we've made so far in price and wage, store investments we've made in terms of the quality of the facilities, the employees are seeing that they're seeing those changes. They're seeing them in sales and their viewing it as all positive.
Operator:
Thank you. We'll now move to the next question from Krisztina Katai from Deutsche Bank.
Krisztina Katai:
I wanted to just follow up on the market share Family Dollar. I mean, certainly, it has been challenged over the years, but it does seem that with price and store investments that is actually starting to change. So a question on traffic, which remained negative on a year-over-year basis but also multiyear. So how important is it to inflect positive for the model to work here? And how do you envision arriving there? Like what are the most critical components of the strategy to actually unlock that?
Richard Dreiling:
Yes. I mean I think as I reflect on what you're asking here, the most important thing we can do is maintain consistent store standards and execute against our operating model. We have -- we know what to do and I think if you look what's taking place, the consumer is responding to it and they're responding to it in terms of a bigger share of their wallet, they're responding in terms of market share. And all of the initiatives that we are putting in place, Krisztina, are all designed for that store experience. Even if you look at what we're doing with labor, we're not trying to take labor out of the store. We're trying to eliminate work so we could spend that on more customer-facing activities.
Krisztina Katai:
That's great. And just a quick follow-up. Again, regarding Family Dollar, but can you just touch on in-stock levels? How is that improving since the new team has been in place? And how far are we from optimal levels of in-stocks?
Richard Dreiling:
Yes. I would say one of the key initiatives in this building is the in-stock level at Family Dollar. Several things are happening. A lot of the manufacturers have retailers on allocation. So if you order 100 cases, you might get 65. And that is affecting everybody right now.
The other issue we are -- we have discovered, we've had for a long period of time is we use a perpetual inventory system and if that system is not right, if it's not showing the on-hand quantities properly, the system will order product. So we're going through a process now of truing that up but I will reiterate one of the -- and people are tired of me talking about it around here, in-stock is one of our key initiatives.
Krisztina Katai:
Right. Thank you so much. Best of luck.
Operator:
[Operator Instructions] Our next question comes from Anthony Chukumba from Loop Capital Markets.
Anthony Chukumba:
Good to hear you're recovering from the COVID. So I just wanted to clarify, you talked about those wage investments. Can you just walk through that again? Because I wasn't quite sure, I think you said $2 an hour, but I wasn't sure on the sequencing of that. So I just wanted to better understand that.
Richard Dreiling:
Yes, sir. We're doing that market by market. And what we're looking at is not only the hourly wages, which is where the bulk of the investment is. We're also looking at coverage to ensure we have the proper amount of coverage and then we're also looking at what I would call the field team, the store manager and the district manager. We do know, and it's proven that when we have the right wage structure, we increased our retention and our turnover has been pretty astronomical and we're seeing that slow down. We know we get better shrink, we know we get better store standards and we get better morale. And that all leads to better execution, which the customer sees on the shelf when they're in the store. So it's a broad-based approach.
Anthony Chukumba:
Got it. Look forward to seeing you in June.
Operator:
We'll now move to our next question from Michael Lasser from UBS.
Michael Lasser:
So Rick, the message today and what it's been for the last few quarters is, look, we're going to burden the cost structure with a lot of investments to get this business to where it needs to be, and we're going to frame and quantify what the return on these investments is going to be at some later date. So could you give at least a framework on what you expect the return on these investments to how you expect them to flow in terms of timing and the nature of how the return on investment is going to look, if it's just sales leverage on fixed cost, it may take quite a bit of time for the enterprise to get back to the operating margin level that it achieved historically.
And as part of that, for the $400 million that you're investing this year, how does that break down between those wage investments that are more structural in nature and the maintenance and repairs that are perceived to be more onetime in nature?
Jeffrey Davis:
Thank you, Michael. This is Jeff. As we think about the returns, and Rick had indicated earlier, there are a number of interdependencies that are related to these investments. So as you can imagine, we are a lot of these investments are complementary to what we're doing with our merchandising and our other store initiatives. Those interdependencies are dependent upon us being able to execute against this against all 16,000 stores, and it will take time through the course of 2023 to accomplish that. We have seen early on at the back half of 2022, some early returns and some tests that we've done. So we're confident that we will have an improvement in returns in future years.
But between the interdependency as well as, quite honestly, trying to execute this and what we are all seeing as a somewhat uncertain macroeconomic environment. The combination of these 2 things, we believe that the impacts of this year will be minimal. We're saying it is minimal because it is not any relevant level for us to actually speak any specifics to it at this point in time.
Operator:
We will now move to our next question from John Heinbockel from Guggenheim Securities.
John Heinbockel:
How are you?
Jeffrey Davis:
Good, sir.
John Heinbockel:
Excellent. Looking forward to seeing you again. Can you touch on, right, the consumable opportunity at Dollar Tree right? I know historically, it's not been a huge consumable business because of the price point limitations. How do you think about that opportunity, right, in terms of getting MPP rolled out coolers everywhere expanding that beyond right, the 3 coolers. And then when you think about guarding against going too far, right, in terms of either mix or cannibalizing FDO if that's an issue?
Richard Dreiling:
Yes, great question. I think as I reflect on the consumables, the $3, $4 and $5 frozen food is a perfect example of there is a -- there's an appetite for it in the stores. I do think it's a balance, but I will say this, consumables drive transactions. And what we have to figure out is how to get a consumable item and a nonconsumable item in the basket together and grow the basket. And that's the challenge right now. So as we look at consumables, John, it's going to be a very selective approach. Hey, this sounds silly, but we introduced Bread into Dollar Tree over the last quarter. We put Ice in Dollar Tree over the last quarter, and they're doing very, very well. And we've done it without offsetting the mix in the store. So it's a methodical process. But I think what's important here is that it's nothing but opportunity if we can manage our way through it.
Operator:
Our next question comes from Paul Lejuez from Citi.
Brandon Cheatham:
Hi everyone, this is Brandon Cheatham on for Paul. I want to dig in on the freight cost. Just curious if you can expand on why wouldn't that be a benefit in real time spot rates are below where you contracted. I just want to imagine you'd be able to go back to your business partners and negotiate something that looks a little bit more like the freight costs that are being experienced on the spot market. So just curious if you can expand on some of the dynamics there and the timing of that benefit this year and next year?
Jeffrey Davis:
Yes. So there's a couple of pieces to this. First off, our teams are always going back to our supplier partners and looking for ways to reduce our costs where that is available. And to the extent that later they are and given our volumes and sort of our scale to the extent that we can do so, we'll take advantage of that. But part of the challenge also for us is that a large portion of our contracts, about 60% of all the contracted business that we have for any particular year right now. About 60% of that is long-term charter or contracted rates. And that's the reason why those contracts and charters do not roll off until starting late 2024 or 2025.
The other element of this is that we capitalize our freight into our inventory cost. So in any one particular year, to the extent that our inventory is turning, let's say, 4x, you've got that portion that is going to roll over to the next year as part of your capitalized cost. So the combination of those things, so it's going to be the timing of contract expiration and renegotiation. It's going to be the carryover from 1 year to the next are the 2 reasons why for us, we have more of a back-ended loaded benefit of freight in 2023 that we'll be carrying over into 2024. But then also, you have a further continuation of freight cost reductions as those other contracts roll off.
Brandon Cheatham:
That's very helpful. Best of luck.
Operator:
Our next question comes from Kelly Bania from BMO Capital.
Kelly Bania:
Wondering if we can just talk a little bit more about the operating expense investment in particular, the wages. How much of the $430 million is wages and you called out the $2 increase in your labor rates. Just curious if you can help us understand where this brings your average, your starting wage how would that compare to peers once this is implemented? And does this bring you in line with peers or get ahead of the rest of the industry?
Jeffrey Davis:
I appreciate your question because I realized I didn't answer the $430 question earlier, so I apologize. Of the $430 million, about 2/3 of that is related to wage and wage-related items. The delta, if you will, is around setting the store standards, what we're doing in sort of standards that we're doing IT, what we're doing in our supply chain. As it relates to our wage rates of $2, it definitely brings us more competitive in the marketplace as it closes the gap. We believe that, once again, it's not only closing the gap on hourly wages, but then it's also for us collectively bringing us more competitive as it relates to the field leadership teams. We haven't provided any sort of average hourly rate, but it is about a 20% increase over the course of the 2 years that $2 would represent.
Kelly Bania:
Okay. That's very helpful. And just another one on freight. The comments you provided are very helpful, but you've outlined sort of $2 in freight really over the next couple of years. I guess the question is, would that be a -- would that reflect a full recovery of the significant increase in freight costs that you've had over the last few years? Or is that assuming only a partial recovery.
Richard Dreiling:
It would only be a partial recovery. There's a number of factors to this. One, freight rates have not gone back to 2019 levels in its entirety. Also, as you think about freight, there are really 3 components of freight and everyone seems to want to focus only on the transatlantic portion. But there's import and -- I'm sorry, inbound and outbound freight also, which is ultimately included in all of this. And those particular rates you have not seen a significant reduction or return back to 2019 as driver costs, chassis costs, fuel, all those components continue to be at more elevated rates versus 2019. So as we look at these freight cost reductions in its entirety, we do not -- we're not forecasting this is going to recover that which we would have seen in comparison to 2019.
Operator:
Thank you. We'll now move to -- apologize please go ahead. We will now move to our next to Joe Feldman, Telsey Advisory Group.
Joseph Feldman:
I had a question about the investments that you guys are making, you've outlined both the Dollar Tree side, the Family Dollar side. As you think of store improvement, presumably, it's more on the Family Dollar side, but I'm just curious how you balance the investments between the 2 and how you decide where to allocate to each brand and where you feel there's more need for store improvement. Is it -- because it sounded like Dollar Tree actually could use some store improvement, too, which I think I was a little surprised by, but maybe you could address that issue?
Richard Dreiling:
Yes, I'll take that, Jeff, and then you can jump in. The first thing I want to say is we believe in the long-term earnings power of both banners and we think there's potential there, and I look forward to sharing that with everybody on the Analyst Day. I think if we are honest with ourselves, which we are, the facilities in both banners need work in terms of the quality of the gondolas, floor care, ceiling care, lights, I can go down the list that applies to both banners.
I think when you look at the difference between the 2 banners and what shows up in one versus the other, in terms of store standards is Dollar Tree has no planograms in it. So it's incredibly easy just to put stuff on the shelf. And a lot of sins get covered up when you do that. Family dollar, every square inch of that thing when we get done by the middle of the year, we'll be playing to grant. And out of stocks, rusty shelves and more problems show up when you have a planogram based merchandising strategy. So I would look at you and say, both stores have a tremendous amount of opportunity. Both banners have a lot of long-term earnings power. So it's really not a balance. It's more about getting it done in both.
Joseph Feldman:
Got it. Got it. That's helpful. And Rick, you had mentioned earlier that you're seeing that trade down or trade in from higher income consumers, which I know we've all heard about and are seeing it as well. But how does the health of the consumer factor into your forecast this year? And how you see the consumer health playing out? That would be great.
Richard Dreiling:
Yes. I mean what we're seeing is the consumer making $80,000 a year is trading down. And that's -- timing is everything. We're doing better on so many fronts with a long way to go. They're having an experience they can relate to. But as far as planning for that in our outlook, no, we don't do that.
Joseph Feldman:
Got it. Okay. Good luck this quarter.
Operator:
We will now take our next question from Simeon Gutman from Morgan Stanley.
Simeon Gutman:
Two-parter on Family Dollar. First, on the comp, we would have expected it to be more traffic than ticket given some of the price investments. It's the opposite. So maybe related to that last question to diagnose how the customer is spending and maybe give us a peak on the basket composition? And then second, it's a little bit of a twist on what was asked before. There is a step change that should happen in Family Dollar with EBIT and margin. Your comps are inflecting. Obviously, the business isn't really generating a lot of profit. I know there's a lot of assumption in that, but curious what's the assumption that needs to happen for the profit that you have to keep comping at this rate? Or there is some profit or is there some profit unlock?
Richard Dreiling:
So in terms of the composition of the basket, like every other consumable retailer, we're seeing the shift toward more consumables. I do think that -- So the basket is increasing.
Jeffrey Davis:
So there's 2 things, if I could maybe add to that. One, as it relates to the -- one, quality of merchandising, the opportunities we're presenting. But also from a pricing perspective, the work that we've done, there's been a multipoint reduction against the market, if you will, in our pricing to gain parity as Mike -- excuse me, as Rick has said, with respect to our competitive sets as well as widening the gap of grocery and convenience. So the combination of those 2 things is very encouraging for us as it relates to improved traffic as well as being able to drive still ticket at those lower prices on a year-over-year basis. And then as it relates to Family Dollar and its ability to generate greater levels of profitability, there is somewhat of a step function that's going on right now with these accelerated investments. And it's more exacerbated against Family Dollar P&L because of its overall unit economics versus that of Dollar Tree, as you well recognized.
We believe that as we continue to drive greater productivity from a top line perspective, improve -- simplify our stores and its operating procedures such that we can further leverage off of the existing base that we're building up. We believe that we will be able to drive higher levels of profitability. The last piece is from a margin perspective, gross margin perspective, the things that Larry is doing, we're talking about from a private label additions that, that will also help us from a gross margin. So top line sales, gross margin improvement and then leverage against some of these expenses that we are now incurring over the longer period of time.
Richard Dreiling:
If I could add one thing. I think the key takeaway on what has been said is there is no structural problems with either [ Van ]. It's all fixable, and we know how to fix it.
Operator:
Thank you, ladies and gentlemen. We have reached our allotment time. I will turn it over to Randy Guiler for final comments.
Randy Guiler:
Sure, Dave, thank you very much. Thank you for joining us on today's call, and have a good day. Take care.
Operator:
Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator:
Good day, and welcome to the Dollar Tree Third Quarter Earnings Call. Today's call is being recorded.
At this time, I would like to turn the call over to Randy Guiler, Vice President of Investor Relations. Please go ahead.
Randy Guiler:
Thank you, operator. Good morning, and welcome to our call to discuss results for Dollar Tree's Third Fiscal Quarter 2022. With me on today's call are Executive Chairman, Rick Dreiling; President and CEO, Mike Witynski; and CFO, Jeff Davis.
Before we begin, I would like to remind everyone that various remarks that we will make about our 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. These statements are subject to risk and uncertainties, and our actual results may differ materially from those included in these forward-looking statements. For information on the risks and uncertainties that could affect our actual results, please refer to the Risk Factors, Business and Management's Discussion and Analysis of Financial Condition and Results of Operations sections in our annual reports on Form 10-K filed March 15, 2022, our Form 10-Q for the most recently ended fiscal quarter, our most recent press release and Form 8-K and other filings we make from time to time with the SEC. We caution against reliance on these forward-looking statements made today, and we disclaim any obligation to update or revise these statements, except as may be required by law. Following our prepared remarks, Mike and Jeff will take your questions. [Operator Instructions] I will now turn the call over to Rick.
Richard Dreiling:
Thank you, Randy. And good morning, everyone. In my short time here, I have been incredibly impressed with the team's overall enthusiasm and willingness to accept and embrace much needed change. As I stated last quarter, we are making change happen to create long-term shareholder value and enable the next wave of profitable growth for Family Dollar and Dollar Tree.
The company is moving at a rapid pace. We have done a remarkable job of rebuilding our executive team and with retail thought leaders that are subject matter experts and eager to be part of this transformational journey that we have embarked on. In a short period of time, all of our C-suite positions have been filled as well as new leadership roles dedicated to a number of key areas, including diversity, sustainability, compliance and communication. Last quarter, we shared news of the material price investments made at Family Dollar. These actions got on price parity with key competitors and widen our spread to grocery and drug stores. Customers are recognizing this commitment to value, which contributed to a 4% comp sales increase and the segment's first quarterly traffic increase in 3 years. The teams are focused on improving store standards. They are committed to clean them up, straighten them up and fill them up. Improving sales productivity is a vital component of the Family Dollar turnaround, and we are extremely focused on driving sales per square foot, unit sales growth and transaction count growth. We are a company with more than 16,200 stores. But the way I prefer to look at this is that we are really 2 growth companies with 8,100-plus stores each. Both Dollar Tree and Family Dollar are unique businesses with 2 different go-to-market strategies. Having 2 distinct large segments provides us flexibility like none other in value retail and both Dollar Tree and Family Dollar have extraordinary opportunity for growth and improvement over time. We are prioritizing our areas of growth, and we are moving with urgency. The new management team is in-house. We've taken aggressive action on price. The advertising and marketing cadence has been enhanced. We are in the midst of a cultural transformation throughout the organization, designed to enhance our associate and customer experience. Store standards are improving. Years of sales productivity opportunities are ahead of us and work on supply chain and technology initiatives will enhance us to achieve our ultimate goals. I know many are eager to learn more about all of our plans, including the timing, the magnitude and the expected returns. These details will be shared at our spring Investor Day in a more structured format as our new leadership team has assembled more time together. We are entirely committed on taking the right steps to transform this organization for the long-term. On behalf of our directors, I want to thank each of our associates for their commitment, dedication and effort, especially for their willingness to embrace much needed change. This is a journey that I am thrilled to be part of. I'll now turn the call over to Mike.
Michael Witynski:
Thank you, Rick, and good morning, everyone. Thank you for joining us today. As you have seen in recent months, we have announced a number of executives have joined Dollar Tree. I am excited about the caliber and quality of the leadership team we now have in place. This team will lead our company through the next evolution of growth. We are committed to transforming our culture, meeting our shoppers and associates' needs, improving store productivity and efficiencies and delivering improved long-term operating results.
I am pleased with the team's efforts to deliver solid results for the quarter. Our third quarter sales performance reflects the timely execution of merchandising initiatives to drive our consumables business in this uncertain and inflationary environment. Same-store sales for both segments improved from the prior quarter and delivered sequential monthly improvement throughout the quarter. Shoppers are responding to our new value proposition at Family Dollar and Dollar Tree as we focus on driving both traffic and store productivity. With the exception of Q1 and Q2 of 2020 at the initial onset of the pandemic, our 6.5% enterprise comp represents our best quarter since the Family Dollar acquisition. By segment, the comp was comprised of an 8.6% increase for Dollar Tree and a 4.1% increase for Family Dollar. In recent quarters, we refined our strategies at both Dollar Tree and Family Dollar to focus on the traffic-driving consumables side of the business. Our transition to the $1.25 price point has enabled our merchants to greatly enhance value for our shoppers. For the second consecutive quarter, our consumables comp outpaced the discretionary comp at Dollar Tree. The team delivered a 9.3% comp on consumables with key contributors being in food and beverage, snack and cookies and candy. Family Dollar consumables increased 4.7% on a comp basis. Despite the ticket headwinds related to our price actions in Q2, shoppers are clearly recognizing the greater value and are responding to our enhanced advertising initiatives. Importantly, at both Dollar Tree and Family Dollar, we saw an acceleration in comp performance throughout the quarter, with October being our strongest month. We have a number of key sales-driving initiatives to drive productivity. For Dollar Tree stores, we are continuing to exceed the customer's expectation for value, our merchants do a tremendous job of effectively managing the ever-changing assortment that wows our shoppers, expanding our $3 and $5 offering into more stores. We ended the quarter with our plus assortment in nearly 30% of our Dollar Tree stores, and we'll continue to aggressively expand this initiative in the years ahead. We are currently refining our $3 and $5 assortment as our team operates in an environment of continuous improvement based on learnings. We are developing our frozen assortment to meet our shoppers' family needs as they are looking to save money by dining at home. We are aggressively expanding our offerings of protein, pizza, breakfast items and family sizes at price points that meet their budgets. We will continue to focus on winning the season. Dollar Tree is a destination for shoppers looking to celebrate holidays, events and seasons. Our offering will be better than last year but not as good as next year as we continue to improve our assortments. Family Dollar, from a pricing perspective, is in the best position in more than a decade. Now that we have taken action to reestablish price parity, we are committed to maintaining our competitiveness.
Other Family Dollar initiatives designed to improve sales per square foot, unit sales and transaction count include:
improving our store layouts through improved adjacency flow, adding linear square footage, expanding immediate consumption DSD categories and optimizing the beverage and frozen food offering. Developing private brands, we are in the process of growing and improving our private brand performance by providing shoppers more choices and a broader offering of quality products at a greater value. Over time, we believe this will enhance customer loyalty as well as our margin profile.
We are refining our marketing effectiveness to provide customers with convenience, value, variety and an improved shopping experience. We have evolved our print advertising calendar and format to be more relevant to our customers to drive their visit frequency. We are also in the process of relaunching our Smart Coupon program, designed to improve quality, availability, clip rate and redemptions. In this changing and dynamic environment, we feel we are implementing the right plans to drive sales productivity, enhance margins and improve efficiencies to enhance the long-term benefits to each of our stakeholders. In October, Jeff Davis joined Dollar Tree as our new CFO. Jeff brings more than 30 years of financial leadership to the organization with much of his experience coming from large retailers, including Walmart, JCPenney and Darden. Jeff is very much focused on value creation through strategic growth and strategic decision support as well as value preservation through governance and efficiency in operations. Jeff has been the company for nearly 2 months, but he is making a difference already. I'll now hand the call over to Jeff to provide more color on Q3 and what's ahead of us.
Jeffrey Davis:
Thank you, Mike, and good morning, everyone. I am delighted to join the Dollar Tree team at such a pivotal time. I've been in my seat for almost 8 weeks, and I have experienced tremendous energy and excitement across the entire organization as the team is an embracing change. While the company has been around for decades, I believe we are in the early phase of significantly improving our long-term operating performance. In October, I had an opportunity to meet several of you at store visits and I look forward to connecting with a larger group in the near future. More details to come.
Since Mike and Rick already covered our third quarter sales results, I will now move directly to the discussion of operating income. Unless otherwise stated, all third quarter comparisons are against the same period last year. To supplement my comments, we are introducing a quarterly presentation on our website at corporate.dollartree.com/investors, which outlines several key operating metrics. We hope you will find this additional information helpful to better understand our business. Operating income increased 22.8% to $381.3 million or 5.5% of total revenue, a 70 basis point improvement in operating income margin. This was led by a 240 basis point improvement in gross profit margin, partially offset by a 170 basis point increase in our SG&A expense rate. Gross profit increased 17.5%. The Dollar Tree segment gross margin improved 520 basis points, primarily from higher initial mark-on related to the move to $1.25 price point, lower freight costs and sales leverage, partially offset by greater penetration of lower-margin consumable merchandise and product cost inflation. Family Dollar's gross margin declined 100 basis points, largely due to a product mix shift and product cost inflation. We expect to see continued pressure across both segments related to the inflationary cost environment and merchandise mix as our consumable sales are expected to continue outpacing discretionary. SG&A as a percentage of total revenue increased 170 basis points to 24.4%. The increase is principally related to elevated repairs and maintenance as part of our commitment to improve store standards, investments in store hourly wages and higher inflationary costs across a number of expense categories, including utilities. Corporate support and other expenses increased 30 basis points to 1.4%, primarily from increased stock compensation expense, higher incentive comp and professional fees. From a bottom line basis, net income improved 23.1% to $266.9 million or $1.20 per diluted share in comparison to $0.96 per diluted share last year. Moving to the balance sheet. My comments reflect balanced comparisons to the end of Q3 2022 versus Q3 2021. Combined cash and cash equivalents totaled $439 million compared to $701 million. The reduction in cash is largely attributed to the repurchase of approximately 2.86 million shares for $397.5 million in Q3 of this year. Inventory increased 31.1%, primarily from inflationary product and freight costs, expansion of $1.25 in multi-price plus inventory and store growth. Also recall last year, shoppers pulled forward purchases well ahead of the holiday season, concerned about product availability, while we were chasing trans-specific deliveries of discretionary products as our inventory levels dip well below normal operating levels. This year, shoppers purchasing behavior appears to be more closely timed to holiday dates. Finally, unit counts are at similar levels to October 2019. Our inventory is fresh. We have limited-dated inventory well within manageable levels. Capital expenditures were [ $391.2 million ] in the third quarter versus $295.6 million last year. For fiscal 2022, we now expect capital expenditures to total approximately $1.2 billion. As we look to Q4, we see the following affecting our business. We will anniversary a significant number of Dollar Tree stores, approximately 2,500 in December and 3,000 in January, the transition to the $1.25 price point a year ago. We previously experienced an outsized benefit to comps and margins associated to the transition. The economy continues to pressure middle and low household income customers, resulting in needs-based purchasing. We expect consumables to outperform discretionary, which negatively impacts gross margin. We are cycling advanced child tax credit payments which were distributed mid-month from July to December in 2021. On a year-over-year basis, we are facing higher costs from suppliers related to this inflationary environment. While at Family Dollar, we do have the flexibility to adjust price. At Dollar Tree, where we are at a fixed price points, it takes us time to adjust quantities and pack sizes for cost changes, which can lead to near-term pressure to margins. We will continue to invest in store and DC standards and expect to have higher year-over-year expenses in repairs and maintenance. In addition to being right on price, we will be right on wage as it continues to be a competitive market for talent. We are raising our sales outlook for the year. Consolidated net sales for the year are now expected to range from $28.14 billion to $28.28 billion compared to our previous outlook range of $27.85 billion to $28.10 billion. We expect to deliver mid-single-digit comp sales increase for the year comprised of a high single-digit increase at Dollar Tree stores and a low single-digit increase in Family Dollar. Selling square footage is expected to grow by approximately 2.8% as we are experiencing supply chain delays related to procuring equipment and fixtures for store openings. For Q4, we estimate consolidated net sales will range from $7.54 billion to $7.68 billion based on a mid- to high single-digit increase in same-store sales for the enterprise. At the end of Q2, we expected fiscal 2022 diluted earnings per share to be in the range of $7.10 to $7.40. Due to several factors, including, but not limited to, an acceleration of consumable product mix shift and elevated product cost pressure, we expect to be in the lower half of the previous outlook range.
Other considerations for our updated 2022 outlook include the following:
we expect consolidated depreciation and amortization to be approximately $770 million. Net interest expense is expected to be $30 million in Q4 and $127 million for the year. Our outlook assumes a tax rate up 24.3% for the fourth quarter and 23.7% for fiscal 2022. Weighted average diluted share counts are assumed to be 222.3 million shares for Q4 and 224.2 million shares for the full year. Our outlook does not include any share repurchases. As of October 29, we had $1.85 billion remaining on our existing share repurchase authorization.
I'll now turn the call back to Mike.
Michael Witynski:
Thanks, Jeff. I am proud of our team's efforts. During a period of material organizational change, a disruptive hurricane through the Southeast and macro uncertainty contributing to the highest inflation in 40 years, we delivered increases of 8.1% in sales, 17.5% in gross profit, 22.8% in operating profit and an increase of 25% in EPS. Our results continue to reinforce the relevance of Dollar Tree and Family Dollar to millions of households across North America.
As you know, in late June, we announced that a number of executive positions would be changed. I am proud to share that by mid-November, all seats are filled, and we are very confident in the outstanding team we have built. All additions have been successful leaders throughout their careers and bring new, fresh perspectives and will enhance our progress. In addition to the executive changes, last week, we announced new leaders for several key areas of the business, including diversity, sustainability, compliance and communications. I am very confident in the team we have developed and that it will enable us to accelerate progress on our transformational journey. In the months ahead, we will be refining and prioritizing our plans to ultimately deliver improved operating performance across both segments. At our spring Investor Day, we will provide you with more transparent and comprehensive view into the opportunity ahead us and the path to get there. Before we transition to Q&A, I want to sincerely share my gratitude to our associates, especially in Florida and the Carolinas for their efforts during Hurricane Ian at the end of September. Their efforts through the preparation for and the recovery from this devastating storm was critical to countless families and communities we serve. In many cases, our Dollar Tree and Family Dollar stores were among the first to reopen to assist customers with products they needed most. Thank you to each of you. Operator, we are now ready to take questions.
Operator:
[Operator Instructions] We will take the first question from the line of Matthew Boss from JPMorgan.
Matthew Boss:
Great. So maybe first question. At Family Dollar, could you elaborate on the drivers of sequential improvement as the quarter progressed? How much do you think more so of this is tied to the macro or the value trade down behavior versus inning do you think that your company-specific initiatives are in today at Family Dollar?
Michael Witynski:
Yes. Thanks for the question. I think it's a combination of everything that you're seeing going on, the pressure on the customer. And then our merchandising team invested the investment we made in getting our prices right to be at parity in the marketplace and then as well as writing more impactful ads and more frequency of our ads. So I think stronger promotion, stronger base pricing and then the work on the assortment in our [ H2.5 ], I think, is meeting the overall macro impact that the customer is seeing on the pressure that they have to try and meet the budget each and every day.
I think that on a customer, we're seeing -- we're seeing continued pressure. We're -- as I've shared, we're seeing more customers come into our segment. And once they're in our segment, these are -- the majority of the customers are at [ 80,000 ] and higher household income. But even once they're inside the store, we're seeing shifts in their behavior where they're very consumable and needs-based focused to try and make that budget work and stretch it over the month. We're seeing private brands now for 39 weeks in a row have outpaced national brands, 39 weeks in a row. We have not seen that the prior 5 to 7 years where private brands were outpacing national brands, but it's now been 39 years in a row -- or 39 weeks in a row, I'm sorry. And then we're seeing first in a month business is getting stronger. We're seeing our SNAP and food stamp business is growing, and we continue to see credit as outpacing debit. So we do see that shift in the customer coming into our segment, and then when they're in our store, they are shifting into the consumables and needs based to make their budget happen. And I think the work that our merchants are doing are absolutely aligned and helping drive meeting their needs when they're in our store.
Matthew Boss:
Great. And then just at the Dollar Tree banner, what's your overall assessment to date on breaking the box overall? And can you speak to sequential trends with traffic to the banner that you're seeing? Or what's been the reception to Dollar Tree Plus or the rollout of the $3 and the $5 SKUs across the assortment?
Michael Witynski:
Yes. I'll start with $1.25. I think overall, our traffic has been very stable, and we saw a slight improvement in Q3 in traffic. But what was more important is throughout 2020 and 2021, our consumable sales continued to decline quarter after quarter because of the product availability and the assortment we just couldn't provide for the customer at that dollar price point. Once we move to the $1.25 throughout this year, our merchant teams have worked hard at bringing in that new assortment, and we have absolutely change that trend. And instead of declining business in consumables it's now accelerating and leading the growth and I believe over time, that will continue to drive traffic into our stores and Dollar Tree.
So what I'm really excited about is for the second quarter in a row, consumables have outpaced our discretionary business, and it was 9.3%, 9.4% comp sales, but discretionary is still doing well at over 8%. So we like the business and the reaction we're seeing from the customers based on us being able to have a better assortment at greater values on products they need. And I think as we continue to provide that, that will help stabilize our traffic in the long-term going forward. On the $3 and $5, we're seeing great response from our customers, especially on the seasonal side of the product. And that's where we think we can continue to refine and grow that business. And then as well, you've also heard us on the frozen food part at the $1.25, with the cost pressures, it's even hard for us to get a great value assortment at $1.25. So we've moved to multi-price products in our frozen food set. It's easier to communicate to our customers and our associates because it's door by door. And our -- and that assortment, as I've shared, the customers are responding greatly. And again, this is our frozen business for the last 18 months was in a decline because of the same pressures we were seeing on the consumables. And now we've completely reversed that where we have introduced the multi-price $3 and $5 items, customers are responding well, and we see strong growth in our sales there. So I think between the 2 of those things, the consumables side and then the frozen side, over time, we will continue to drive traffic doing. And then on the discretionary side, proven by our continued growth and a 8% comp, the customers still see the value in our seasonal party, toys, crafting and that continues to be strong. So I like the trends we're seeing overall.
Operator:
We will take the next question from the line of Scot Ciccarelli from Truist.
Scot Ciccarelli:
So can you talk about the consumable versus discretionary mix at both banners? It seems like there's a concerted effort to focus more on consumables. Obviously, that helps with traffic, but is margin dilutive. So I guess the question is, how do you guys expect to manage that balance, #1? And then #2, when would you expect the mix pressures to start to ease? Is there like, I guess, a certain target you're kind of shooting for?
Michael Witynski:
Yes. And you're right. Right now, we're meeting the needs where the customer is taking us, and we are improving that assortment. And I'll speak to Family Dollar. Larry got and the merchants have done a wonderful job at really improving that assortment and that pricing for that customer where they need us. And it's all in that consumable and DSD-related product. And we've done that not only in our base pricing, but our promotion pricing and then also in the linear footage dedicated to it, our resets in our 2.5.
So you're right. I think our biggest goal to drive improvement on the Family Dollar side is to get more sales per square foot in our boxes. And the first thing is driving it with consumables and being right on that. But the team is also, at the same time, really working on discretionary to be right on seasonal and home to meet their needs, but really, it's the consumables driving that trade over more than our effort and the works that we're doing on the merchandising side. And then on the Dollar Tree side, just as I've shared, I like what I've seen in the last 2 quarters where one is up 9.5%, the other one is 8%. That's a great balance. And I think, as we continue to provide that value on the consumables side, I think over time, we like when both are 50%-50%, 50%, say, discretionary and 50% consumables. And then as they grow over time, I think like Dollar Tree historically, has always grown low single-digit comps with a combination of traffic and units in the basket. And I think once we settle and cycle through that, providing that effort on the consumables side, we'll get back to that normal cadence that we've seen in the past.
Scot Ciccarelli:
So just from an earnings algorithm perspective, I'm not asking specific guidance for next year, is it fair to assume kind of lower gross margin, buy maybe more SG&A leverage on kind of a go-forward basis maybe than what we've seen historically, just given the mix shift?
Jeffrey Davis:
Yes. This is Jeff. Absolutely, from a standpoint of, given the mix shift and some of the other cost pressures, margin is much more under pressure. But given the increase in revenue, the opportunity to leverage our SG&A is definitely there.
Michael Witynski:
And I would just say, too, the other thing is, as Family Dollar continues to prove their execution and drive market share in these products in DSD and national brands and then even in our private brands, vendor rebates and allowances will follow that because we're executing better. And Larry's team is really working hard on trying to drive that. So it's really even the mix within the mix as consumables grow, there's levers that we can pull with allowances and rebates and then mix in the private brands as that consumer shifts to that should help with some of the margin pressure, too.
Operator:
We will take the next question from line of Joe Feldman from Telsey Advisory Group.
Joseph Feldman:
I wanted to ask you just to go a little deeper. On the private brands, where do you see the most opportunity? Like what maybe categories and where that you're focused on and where you think you can drive some incremental improvement quickly?
Michael Witynski:
I believe across the board. And Larry's team, we have staffed up. We've brought in additional experts in this area on the private brand for Family Dollar. On the OTC and health, over-the-counter drug and health is where we're going to be focused and leaning in first. And of course, on the paper side of it, we think there's opportunity and then just on the everyday food side. So those would be the 3 big areas.
And I think Larry's team, we're organizing around it. We're looking at the brands and driving penetration by category comparing to the rest of the market. And we've partnered with a third-party broker to really help accelerate that. So those would be the 3 big areas, and it's a huge focus for Larry and his team.
Joseph Feldman:
That's great. And if I could follow up with maybe a bigger picture question. I think as Rick had said in his prepared remarks that you view the company as kind of 2 really strong growth companies under one roof and -- which I guess is not too different from the past, but it does imply that there's 2 different go-to-market strategies, which we know and ways of doing business.
So I'm wondering how do you guys leverage the scale of the overall company and the operations? And like has anything changed with that strategy to have these combined fulfillment centers and purchasing power being stronger? Maybe you can just give a little more color on that?
Richard Dreiling:
I'll lead with that if that's okay. Hey, what I would say is the things that -- how we go to market, how we face the customer between the 2 banners are totally different. One is basic consumable retailing, the Family Dollar side. One is consistent everyday low price, one price point. The leverage, the beauty of the combination is all of the backside things that the consumer doesn't experience, the accounting, the HR, the legal. And that's where all those synergies exist even on the supply chain, how we deliver to the stores, how we look at this [ model ]. So all of those synergies are still there.
But what we're doing a much different -- what I would think not only different but better job is with how we're facing the consumer realizing that, one is more emotional driven and then again, one is more concerned with everyday excitement value. Michael, I'll turn it over to you on that.
Michael Witynski:
No. I think you stated it right. Well, the customer-facing side is where we're leveraging, but on the back side, we'll be leveraging all the opportunities we can as one organization.
Operator:
We will take the next question from line of John Heinbockel from Guggenheim.
John Heinbockel:
A couple of questions on Family Dollar merchandising. So one, given the size of the box, how do you think about product breadth versus depth, that fundamental tension? And do you need to accelerate cooler capacity as part of the process? And then lastly, I know you're working on supply chain, right, to try to improve out of stocks. How quickly do you think that begins to impact the business, right? Is that kind of 6 months out, a year out, maybe not that long, [ your thoughts ] would be great.
Michael Witynski:
Yes. So I'll start with the breadth and depth of Family Dollar. Again, Larry and his team is going category by category, and he's already made changes in our new H2.5, but that will be a continuous improvement throughout this next year, as him and his team apply that discipline and strategy to each category, we will be bringing in more SKUs where it makes sense to help meet the needs of the customer and comparing it to the rest of the market. And where we've done that in the categories that he's done so far, we're seeing great results in it. And I think that's why we're excited about our 2.5.
We're also using our linear space more. We're putting in more shelves inside the box and then we can go vertically higher in the gondolas, the [ rows ] of shelving that we have right now. And again, that allows us to bring in more assortment into the store and getting more sales per square foot. The cooler is absolutely an improvement. And every time we remodel a store, we want to bring in more coolers, both cool beverage and frozen beverage because that's where the customer is moving to. And it's a convenience item and it's meeting their needs. So there is room for continued expansion there. And Larry's and his team has even really look at a reset for the whole frozen food set, and where we've rolled that out going into this back half of the year. So that's going to be a continuous improvement side. And on the supply chain, I would say we're constantly looking at the enabling our supply chain, as Rick said, to try and drive efficiencies and making it easier for our stores. And we're seeing improvements right now on things that we're doing in our supply chain. So I think it's -- you'll see it now throughout the next 2 to 3 years on how do we continue to refine our supply chain as a key enabler to drive the efficiencies and make it easier for our stores to get the product in the stores more efficiently.
Operator:
We will take the next question from the line of Ed Kelly from Wells Fargo.
Edward Kelly:
I wanted to ask about the Dollar Tree gross margin. You've hinted in the past that this potentially could be higher than 36% over time. I think if I try to sort of like look at where you're run rating now based upon the commentary around a little bit of incremental pressure in Q4, maybe you're run rating sort of high 35% range. Just thoughts around that.
And then as we think about next year, you do get a big freight benefit likely. How do you think about investing that versus letting that flow through? And I asked that question because the consensus is probably in the high 37% range for next year. And this sort of all boils down to what do you think the right margin is for this business to provide value to customers while also delivering for shareholders?
Michael Witynski:
Yes. Thank you for the question. If you think about our margins right now and as we think about it move forward, it's really driven by what the customer is really leading into and buying. So right now, we're seeing a little more rotation into our consumables versus our discretionary, but yet you're seeing good growth on both sides. We like the balance of that.
We're doing a number of things to continue to provide value to the customer and maintain that margin rate as best we can, recognizing right now that we're still under some level of product cost pressures as well as from a freight component, but still being able to deliver, as you said, high mid-30s types of margin rates. As we move forward, we will continue to look to deliver value to the customer across both of those broad categories of discretionary and consumables. We believe that a number of things that we're doing with a multi-price point will allow us to lean into the discretionary even more and hopefully continue to balance out that end of the business also. So it's really a combination of the two. And it depends on how the customer is in their behaviors and their needs, and we are able to provide them across that broad continuum.
Operator:
We will take the next question from the line of Michael Lasser from UBS.
Michael Lasser:
Jeff, just within your last answer, you mentioned mid-30% gross margin moving forward for the Dollar Tree banner. The Dollar Tree banner has $0.5 billion of costs that were negatively impacted from all the significant amount of freight and transportation over the last few years, especially container costs. Container costs are now back to where they were in 2019 levels.
So understanding that there could be some mix pressure as the consumer focuses on consumables, why would you not get a more significant benefit to Dollar Tree's gross margin from the significant decline in freight cost moving into next year? Should we interpret that to mean that you have to make more sizable investments in Dollar Tree in order to maintain the sales productivity of that banner, especially now that you see how those stores that were early to raise prices last year are performing once they lap that?
Jeffrey Davis:
Yes. As I look at this, there is definitely the opportunity as freight rates start to turn back around. That -- we are on contract. Most of our business we do is on contracted carriers versus spot rates. So there's going to be a little bit of a lag in that timeframe. And at this point, we're not giving any guidance for 2023 as of yet. But to the extent that we continue to see the freight rates and the other transpacific rates coming down and staying down, that will be reflected in our longer-term contract rates.
We will then have the opportunity to balance that with giving back to the customer as well as the shareholder. But having said that -- that's only one component. The other component is underlying product cost. And right now, there is as much pressure and many times in the product cost, underlying vendor product costs as there is in freight. So we have to balance the 2. And definitely keep an eye on, in my mind, is how we create value for the overall organization is balancing that in being priced right in the marketplace for our customer as well as providing a higher return to our shareholders.
Michael Lasser:
And if I could just follow up on that, Jeff. As of November 2022, you have 312 stores that are now anniversarying the rollout of the $1.25 price point from last year. Are those stores comping positively in the range with the rest of the Dollar Tree banner performance?
Jeffrey Davis:
Yes. So we're in the new quarter here, we're not going to give you intra-quarter guidance. And it's really early for us to tell. So I think that when we release our fourth quarter results, we'll be able to tell you a little bit more about that.
Operator:
We will take the next question from the line of Michael Montani from Evercore.
Michael Montani:
Yes. Just wanted to ask, first off, if I could, on the SG&A side. If there's level of comp that you feel you need for natural leverage into the fourth quarter and into 2023 in order to lever some of the expenses there? And then a follow-up.
Michael Witynski:
Yes. Michael, it's a good question. It's one in which -- what would be a natural level to leverage in normal circumstances versus what we are doing, as we had mentioned earlier, a good focus, continued focus and commitment around elevating our store standards investing in not only store standards, but our wage rates for our stores. We're -- and the combination of the two, we have been making some material investments. But if you look over a period of time, we've been able to leverage our SG&A, if you will, on about a 2% to 3% comp.
Michael Montani:
Okay. And then if I could just follow up on CapEx. The past few years, it was trending around $8 a foot. In this year, it looks like it could be north of $9. So given some of the inflationary components there and the investments you all are making, is that kind of the right baseline that $9 plus to build off of? Or should we think of this as maybe some more catch-up that could subside?
Michael Witynski:
Yes. Once again, I don't want to give any guidance beyond 2022 other than what we've provided. The investments that we're making this year and technology and supply chain on top of our normal base is what's really driving the increase. And we believe it's the right thing to do as we set up for the right capabilities for us to accelerate our growth going forward.
Operator:
We will take the next question from line of Chuck Grom from Gordon Haskett.
Charles Grom:
Jeff, on the implied fourth quarter guide, can you help us think about the segments where you see more margin compression relative to the third quarter? It looks like you're anticipating operating margins to be down about 30 basis points or so. They were up about 70 basis points in the third quarter on a similar comp. So just wondering if you hold our hands on the segment for 4Q a little bit?
Jeffrey Davis:
Yes. We historically have not given guidance necessarily on a banner basis. We look at it in total, the pressure that we're seeing is, once again, the continued rotation in the consumables and how the customer is responding there as well as we know that we are continuing to see other inflationary cost pressures across the P&L. But all of this is more -- was anticipated back when we gave our earlier guidance, it's really the product mix shift that is the predominant sort of driver of our -- sort of direction around the lower half of the range.
Michael Witynski:
And the continued pressure on cost.
Charles Grom:
Okay. Great. And a follow-up question for Rick and Mike. Obviously, the price investments a few months ago were smart. I'm curious when you think out over the next couple of years and the next big levers you can pull to improve productivity, I guess, what should we be thinking about? Mike you touched on it a little bit in terms of raising the gondola heights adding coolers. But I guess, maybe a little bit of looking inside the playbook on what to expect?
Michael Witynski:
Yes, I would say that...
Richard Dreiling:
Go ahead, Mike. I'm sorry.
Michael Witynski:
Yes, I would say...
Richard Dreiling:
Go ahead, brother, I'm sorry. Bye-bye. Go.
Michael Witynski:
Rick opened up, let's to clean it up, fill it up and straighten it up. I think getting the product filled in our stores and better store conditions and more consistently for our customer is one thing. I think that private brands is another big leverage. And I think the work that Larry and the team are going to do yet that we're really at the beginning of that doing a better job on the category by category assortment that our merchants need and being priced right. I think those are the big levers inside our store to really keep driving the overall sales per square foot of our buildings.
Richard Dreiling:
Yes. And the only thing I would add to that is we are -- especially on the Family Dollar side, we are under skewed and we are under skewed based on how we ship product to the stores. We tend to ship only in case packs versus eaches for the higher margin, slow-turn merchandise. If you look at our cooler commitment, we are under cooled for lack of a better phrase in our Family Dollar stores and probably our Dollar Tree stores. So there is lots of upside by managing the SKU base.
Operator:
We will take the next question from the line of Kelly Bania from BMO Capital.
Kelly Bania:
I was wondering if you could just help us give us a little more specific magnitude of the product cost inflation you're seeing on the consumables versus the discretionary side of both businesses? And just with -- as you work with suppliers, are you seeing any light at the end of the tunnel in terms of the product cost inflation front?
Jeffrey Davis:
Yes, Kelly, maybe the best way to describe the support dimension to it is, if you take a look at our inventory, and you take a look at our inventory on a year-over-year basis. And in my prepared remarks, I had mentioned that part of the inventory increase was as a result of last year, the covers being fairly there last year as a result of customer pull forward in the holiday and then us chasing goods. But even if you step back from that, about 40% to 45% of our increase in inventory on a year-over-year basis is as a result of product -- vendor product cost increases. There's another roughly 20% that is as a result of higher freight costs associated with those inventories.
So just those 2 components represented about roughly 60%, 65% of the increase in the cost of our inventory. And that's what is now embedded in our inventory and then, of course, we'll be rolling through with respect to margins on a go-forward basis, in which we have been dealing with over the course of the year. Yes. As it relates to -- our merchant teams continue to be, I think, very resourceful and looking at different suppliers, negotiations, working with them around allowances, working with them across other ways to get support on the business. And then, of course, one of the things that is really important to us, and Mike had mentioned is we're leaning into is private brands and the opportunity to blend that more into our offering. Our customers are looking for that opportunity, and it gives us more margin protection.
Operator:
We will take the next question from line of Simeon Gutman from Morgan Stanley.
Simeon Gutman:
It's Simeon Gutman. Following up on this freight question, I wanted to ask maybe a different way. So is part of it that the timing of contracts means that we don't see a lot of the savings in '23? Or are you just reserving the right to figure out how to plan the business? There will be savings, but you're not sure of how to reinvest or use the savings yet.
Jeffrey Davis:
Yes, I think you're spot on. As it relates to the freight those contracts and the way that we would recognize it is more of a forward look. So it would be into a 2023 year. And then as that freight -- as we negotiate this new freight costs or see those freight costs coming down, it would run through our inventory turns.
Simeon Gutman:
Okay. So I guess it's a '23 into '24 phenomenon where the real savings builds up, is that the right way to interpret that answer?
Michael Witynski:
We should see in the back half of the '23, we should start to see. It's about a quarter drag. We turn our inventories 4x a year. So it's usually about a quarter drag once we start appreciating the lower rates, then we can see that in our product as it's coming through.
Simeon Gutman:
Okay. And then just my quick follow-up. On the traffic on Dollar Tree, can you talk about -- I'm sure this has been asked, but why like multiyear, I think it got a little better this quarter, but structurally, it's been down for the past several years. Can you talk about that? And then why shouldn't the right algo be you get price, but traffic is either flat or it could decline because it's hard to understand why the traffic has structurally been weaker over the last several years?
Michael Witynski:
Yes, I would just say this. I think it's a lot due to our assortment that we provided for our customer, and the majority of that was on the consumable side. And then just during the pandemic, our customer, it was -- we weren't high consumable-driven and high discretionary where they were -- when they had money in their pocket, trips were consolidated in '20 and '21, and they were buying high-ticket items to decorate their homes, decorate outside and replacing a lot of things inside their house. That's not what Dollar Tree is at our single fixed price point.
So '20 and '21 were okay for us. But when we saw the consumable side of the business, that assortment go away, that was impacting our traffic. That's why I'm really excited about going forward. The last 2 quarters now, we're seeing that consumable sales come back 9.4% comp in the third quarter and we see that continuing, especially on the consumable. And then on the frozen side of the business, we do see that traffic starting to settle back into what Dollar Tree has been known for, that low single-digit traffic increases with ticket increase to have a nice go-forward balance between the two and continuing to balance our mix between consumables and discretionary. I think that's ahead of us and that's what the work that the team has been doing. In the last 2 quarters, we're seeing evidence of it.
Operator:
There are no further questions, so I will hand it back over to your host to conclude today's conference. Thank you.
Randy Guiler:
Thank you, Caroline, and thank you for joining us for today's call. Our next quarterly earnings conference call to discuss both Q4 and fiscal year-end results is tentatively scheduled for Wednesday, March 1, 2023. Thank you, and have a good day.
Operator:
With that, that does conclude today's call. Thank you for your participation, and you may now disconnect.
Operator:
Good day, and welcome to the Dollar Tree, Inc. 2Q 2022 Earnings Conference Call. Today's call is being recorded.
At this time, I'd like to hand the conference over to Randy Guiler, VP of Investor Relations. Please go ahead.
Randy Guiler:
Thank you, operator. Good morning, and welcome to our call to discuss results for Dollar Tree's Second Fiscal Quarter 2022. With me on today's call are Executive Chairman, Rick Dreiling; President and CEO, Mike Witynski; and CFO, Kevin Wampler.
Before we begin, I would like to remind everyone that various remarks that we will make about our expectations, plans and prospects for the company constitute forward-looking statements under the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties, and our actual results may differ materially from those included in these forward-looking statements. For information on the risks and uncertainties that could affect our actual results, please refer to the Risk Factors, Business, Management's Discussion and Analysis of Financial Condition and Results of Operations sections in our annual report filed March 15, 2022; our Form 10-Q for the most recently ended fiscal quarter; our most recent press release and Form 8-K; and other filings we make from time to time with the Securities and Exchange Commission. We caution against reliance on these forward-looking statements made today, and we disclaim any obligation to update or revise these statements, except as may be required by law. Following our prepared remarks, Mike and Kevin will take your questions. [Operator Instructions] I will now turn the call over to Rick.
Richard Dreiling:
Thank you, Randy. Good morning, everyone. Mike and I and our new Board have been together for just over one quarter now. As planned and expected, change is underway, and we are moving at a fast pace. We are entirely focused on taking the right steps to transform this organization for the long term through growing and improving Family Dollar and Dollar Tree. We are 90 days further down the road from our last earnings call, and the opportunity and action steps needed continue to become more clear.
Our main priorities are our associates, the distribution network and supply chain, Family Dollar's pricing and the value proposition in both segments, store standards and technology. Additionally, and Mike will go into more detail, we have a great deal of work underway to improve the company's culture, designed to build an environment of accountability, empowerment, courageous leadership, transparency and fostering two-way dialogue. And we are orchestrating these changes in one of the most unique and dynamic environments I've experienced in my retail career. Inflation is at its highest in decades as shoppers are experiencing higher costs related to food, fuel, rent and more. Supply chains have been strained and inconsistent. Inventory levels are higher across retail, and consumer shopping patterns continue to zig and zag. Let me be very clear. We are not here to take half measures or to defer high return capital and operating investments in order to manage earnings. We are honed in on taking steps necessary to seize the great opportunity for us and deliver to our shareholders, our associates and our customers the great company they deserve. And by executing on this commitment, we'll deliver the greatest possible risk-adjusted returns to our shareholders. We'll not waver from this strategy. You will hear from Mike and Kevin later in the call about some of the actions we're taking to fix Family Dollar. As you know, our new leadership team is taking shape, and the team is moving to accelerate actions to improve the business. The most notable action is our decision to move forward with price investments that began in July and will carry into the second half intended to close our historical GAAP and pricing to key competitors. We believe this is a necessary action to provide the right value proposition and a foundational step to improve Family Dollar long term and that it will pay off handsomely. There is much more to do to enhance the results of Family Dollar, and you will hear about some positive improvements beginning to be made later in the call. That said, the refreshed team has been together for about a quarter, and we feel very confident in our ability to fix Family Dollar and materially improve its performance long term and in the process, create enormous value. We are a growth company. We are making change happen to create long-term shareholder value and enable the next waves of profitable growth for Family Dollar and Dollar Tree. On behalf of our Board, I want to thank each of our teams for their efforts on delivering very good results for the second quarter. I'll now turn the call over to Mike.
Michael Witynski:
Thank you, Rick, and good morning, everyone. Thank you for joining us today. We are dialed in today from our Annual Field Leadership Summit. More than 1,000 leaders, including every district manager in the company, have gathered for several days to learn, collaborate and focus on all things Family Dollar and Dollar Tree. This is our first large in-person meeting since 2019. The energy and excitement here makes me and each of us more inspired than ever. We will transform our culture and company, and we will do this together.
Rick just mentioned that we are moving at a fast pace. The theme of our leadership summit is, in fact, Lead with Speed. I want to publicly thank all of our participants for their commitment, dedication and focus while attending this great event. I'm proud to be part of your team. At these meetings, we typically talk about our company's strategy and share proof points of our collective successes. But this year is different. This year, I'm speaking to our leaders about something no less important than strategy. It's our company's culture. Every retailer has a playbook when it comes to strategy. But what sets the winning companies apart is their culture. Just as Rick mentioned, we are committed to developing a culture of accountability, empowerment, courageous leadership, transparency, and fostering two-way dialogue. We have recognized and acknowledged to ourselves that we have substantial opportunity for improvement in this respect. We have the courage to address this head on, and we would deliver the culture necessary to provide our associates, the customers and the shareholders the greatness they deserve. Also at this summit, our field leaders got their first look at the initial holiday buys purchase for the new $1.25 price point. We are all excited by the compelling and relevant assortment sourced by Rick McNeely's Dollar Tree merchant team and are very confident our shoppers will be wowed by these new items and the great values over the upcoming holiday season. We are undergoing a period of change, exciting change, and we have accomplished a great deal and what I'd call the first 100-plus days since our Board was reconstituted. A few months ago, we announced a number of leadership changes. We are actively engaged in recruiting leaders to the organization with the right perspectives, experiences and skill sets to help transform our company. The great opportunity before us has attracted the attention and interest of the strongest leaders in retail. In just a few months, we have already filled several key roles with exceptional talent, including Larry Gatta as Family Dollar's Chief Merchant, John Flanigan as our Head of Enterprise Supply Chain; and Bobby Aflatooni now leads our enterprise IT department. This morning, we announced that Jeff Davis will be joining Dollar Tree as our new CFO. Jeff has many years of experience as a retail CFO and spent nearly a decade in executive leadership roles with one of the largest retailers. And we have carefully reviewed a field of exceptional candidates for our COO and General Counsel executive roles. The teams are gelling, and the new leaders are hitting the ground running. I look forward to sharing upcoming announcements as we round out the executive team for the next waves of growth and transformation for Dollar Tree and the Family Dollar business. In light of the substantial leadership changes, I felt that we could deliver a more useful and productive event if we will defer our Investor Day from October until the spring of 2023. We will share more details on the event as it takes shape in the months ahead. Our second quarter performance reinforces the relevance of our brands for millions of households as they continue to face cost pressures across the board. The team delivered increases of 6.7% in sales, 14.2% in gross profit, 25.7% in operating profit and 30.1% in EPS while successfully navigating through another quarter of macro uncertainty. Now to Q2 performance by banner. I am pleased with the quarter delivered by Family Dollar team. The positive 2% comp represented an acceleration from Q1 on a 1-, 2- and 3-year stack basis. A 3.3% increase in average ticket more than offset a 1.2% decline in transaction count. Same-store sales were relatively balanced throughout the quarter as monthly comps range from a positive 1.5 to a positive 2.5. Despite supply chain challenges and OTC-related categories, the consumables comp increased 4% for the quarter. Discretionary comps declined 4.1% as shoppers continued to manage through this inflationary environment. Compared to the prior year's quarter, we saw 150 basis point swing in product mix from discretionary to consumables. In Q2, consumables represented 77.3% of Family Dollar sales compared to 75.8% in Q2 of 2021. The turnaround of Family Dollar is an enormous value creation lever, and it is getting a great deal of focus and attention. Components of the transformation include, as Rick mentioned, a focus on our people, the DC network and supply chain, pricing and the value proposition as well as our technology. Additional factors include enhancing our culture, elevating store standards, developing our private brands, improving category adjacencies, enhancing the product mix, optimizing vendor partnerships and much more. We are pushing forward on each one of these fronts. We are still early in this journey, but I am enthusiastic about the progress we have made just in the last few months. I want to call out, in particular, the important initiative we have taken on our pricing at Family Dollar. With the recent price investments, we believe Family Dollar is now in a better competitive position on price than it has been for over a decade. We will continue to refine the Family Dollar value proposition to drive store traffic and productivity, and we will fully expect to see great benefits from these and other actions over time. During the quarter for Family Dollar, we opened 95 new stores, renovated 257 stores and relocated 24 stores. We ended the quarter with more than 540 Combo Stores, which continue to resonate with the shoppers while driving more productivity and more profitability. Moving now to the Dollar Tree segment. The Dollar Tree banner delivered another strong quarter. Among the highlights, a 7.5% comp; a 37.4% gross margin, 500 basis points above the prior year's quarter; and a 15.4% operating margin, more than 500 basis points over Q2 of last year. The 7.5% comp sales increase was driven by a 14.2% increase in average ticket partially offset by a traffic decline of 5.8%. Importantly, the consumable business at Dollar Tree was strong. Consumables, which represented 46.8% of the mix in Q2, comped at 7.9%, while discretionary increased 6.7%. The last time the consumable comp exceeded discretionary was at the onset of the pandemic in Q1 of 2020. This demonstrates the success we are seeing in key traffic-driving categories where our merchants have been active in enhancing value, such as carbonated beverage, snacks and cookies and food. As a reminder, our reassortment consumables has been more immediate than the discretionary merchandise given the purchasing cycle, and our sales performance demonstrates that shoppers are reacting favorably to refine the value proposition. Renewed consumables momentum is a good indicator for our continued long-term health of the Dollar Tree banner. The discretionary side of the business was strong despite the negative impact of the limited global supply of helium, which hindered sales of balloon products and the party-related merchandise. Regarding cadence, similar to Family Dollar, comps were relatively balanced throughout the quarter with each month's comping increasing between 6.5% and 8.5%. During the quarter for Dollar Tree, we opened 32 new stores and relocated 5 stores, and we added multi-price assortment to another 697 stores, bringing the total to 2,170 stores as we head into the back half of 2022 and the important holiday season. I would like to speak to what we are seeing in the business as consumers continue to be burdened by levels of inflation not experienced in decades. Overall, sales performance remains in line with our expectations. And in fact, we have modestly increased expectations for Family Dollar for the back half. There are signs of trade down to our stores, and we are focused on the value proposition for both banners in this environment. Like many retailers, we are seeing a shift in consumable preferences as many shoppers are gravitating to needs-based consumables, which is impacting our margin through product mix. Our suppliers are being hit with -- by inflation as well. This, along with our commitments to competitive pricing and the value proposition, is expected to negatively impact our gross margins in the near term. Over time, we believe our business should be able to protect its merchandising margin from inflation effects. And regarding supply chains, from a sourcing perspective, a year ago, we had a backlog of thousands of containers we were working to get through the transpacific shipping lanes. This year, we have a small, manageable backlog. Kevin will go into more detail regarding our updated outlook for the back half of the year. Our outlook will be reduced with most of the guidance reduction related to the Family Dollar as we take action to improve that banner. Of the total, more than half of our guidance reduction is due to pricing actions taken at Family Dollar. The remainder is due to mix shift differences and inflationary cost increases on consumables at both banners. None of this dampens my enthusiasm for our long-term prospects. I'll now hand the call over to Kevin to provide more color on Q2 and our updated outlook.
Kevin Wampler:
Thanks, Mike, and good morning. For the quarter, consolidated net sales increased 6.7% to $6.77 billion, comprised of $3.57 billion at Dollar Tree and $3.19 billion at Family Dollar. Enterprise same-store sales increased 4.9%. Comps for the Dollar Tree segment increased 7.5%, and Family Dollar same-store sales increased 2%. At both banners, the increase in average ticket more than offset the decline in transaction count as shoppers continue to consolidate trips as gas prices are significantly higher than a year ago. Gross profit improved 14.2% to $2.12 billion for the quarter. Gross margin was 31.4% compared to 29.4% in the prior year's quarter.
Gross profit margin for the Dollar Tree segment increased 500 basis points to 37.4% compared to 32.4% for the same period last year as a result of the net of the following. Merchandise costs, including freight, decreased 455 basis points primarily due to higher initial mark-on, partially offset by higher freight costs and increased sales of lower-margin consumable merchandise. Occupancy costs decreased 50 basis points from leverage on the comp sales increase. Distribution costs decreased 20 basis points from leverage and higher capitalized amounts due to increases in inventory levels partially offset by higher hourly wages and higher DC maintenance and compliance costs. And shrink increased 20 basis points primarily from more favorable results in relation to accruals in the prior year quarter. Gross profit margin for the Family Dollar segment decreased 140 basis points to 24.7% compared to 26.1% for the same period last year. The factors include markdown costs increased 80 basis points due to higher promotional and price action markdowns. Shrink increased 45 basis points primarily from more favorable results in relation to accruals in the prior year quarter. And merchandise costs, including freight, increased 15 basis points, primarily due to higher freight costs and higher sales of lower-margin consumable merchandise, partially offset by higher initial mark-on. Similar to Q1, consolidated selling, general and administrative expenses as a percentage of total revenue increased 100 basis points. The SG&A rate for the quarter was 24% compared to 23% in Q2 last year with Dollar Tree favorable to prior year, more than offset by Family Dollar and slightly higher corporate costs. For the second quarter, the SG&A rate for the Dollar Tree segment improved 30 basis points to 22% when compared to the prior year's quarter. Payroll costs improved 90 basis points from leverage on the 7.5% comp and favorable development of workers' comp claims, partially offset by the annualization of minimum wage increases and investments in store payroll; other SG&A, which increased approximately 40 basis points, resulting from unfavorable development of general liability insurance claims; and inflationary pressure across several expense categories. Facilities costs increased 10 basis points primarily from higher utility and repairs and maintenance as we focus on improving store conditions. For the Family Dollar segment, the second quarter SG&A rate increased 200 basis points to 23% compared to 21% in the prior year's quarter. Payroll expenses increased 70 basis points, primarily due to hourly wages and investment in store payroll and an increase in workers' compensation expense due to favorable accrual adjustments in the prior year, partially offset by lower incentive compensation expenses. Store facility costs increased 50 basis points, primarily from higher utility costs and an increase in repairs and maintenance expense as we focus on improved store conditions for our customers and associates. Other SG&A expenses increased 45 basis points due to higher legal fees, debit and credit card transaction fees, store supply expense and inflationary pressure across several expense categories. Depreciation and amortization increased 30 basis points related to elevated capital expenditures for store renovations and improvements. Corporate support and other expense as a percentage of total revenue was 1.5% compared to the prior year quarter of 1.3%. The higher costs primarily consist of increased stock compensation costs. Operating income improved 25.7% to $505.4 million or 7.5% of total revenue in the second quarter, an improvement of 120 basis points compared to a year ago. Nonoperating expenses totaled $30.7 million, comprised primarily of net interest expense. The effective tax rate was 24.2% compared to 23.5% in the prior year's quarter, resulting from higher state tax rates and lower work opportunity tax credits as a percentage of pretax income in the current year's quarter. Net income for the quarter improved 27.4% to $359.9 million or $1.60 per diluted share. This compares to net earnings of $282.4 million or $1.23 per diluted share in the prior year's quarter. Looking at the balance sheet. Combined cash and cash equivalents at quarter end totaled $689 million compared to $985 million at the end of fiscal 2021. Outstanding debt as of July 30 was $3.45 billion. The company repurchased approximately 1.66 million shares at an average price of $141.67 in Q2 or $235.8 million under the share repurchase authorization. Compared to last year, inventory levels at Dollar Tree are up 59.7% in dollars due to increased capitalized freight and distribution costs, additional multi-price Plus inventory and a significant increase in import inventory in transit compared to the prior year. Total units per store are up approximately 20% to prepandemic Q2 2019 levels but are expected to normalize as we go through the back half of the year. The inventory is fresh and basic in nature and does not represent a significant markdown risk. Inventory levels at Family Dollar increased 35.7% compared to Q2 last year due to increased capitalized freight and distribution costs and an increase in the average unit cost. Total units per store are below prepandemic Q2 2019 levels. Capital expenditures were $276.2 million in the second quarter versus $229.1 million in Q2 of last year. For fiscal 2022, we currently expect that consolidated capital expenditures will be approximately $1.4 billion. Depreciation and amortization totaled $193.5 million for Q2 compared to $176.1 million in the second quarter of last year. For fiscal 2022, we expect consolidated depreciation and amortization to be approximately $770 million. As we look to the back half of 2022, we see the following affecting our business. As Mike mentioned, we are accelerating price investments in our Family Dollar business. These investments are designed to improve the value proposition for our shoppers and to drive traffic and store productivity. This investment has a near-term impact on profit, but we expect it to accrue long-term benefit. We have seen consumer purchasing shift based on economic conditions to a more consumable-based basket at both banners, which will negatively impact our expected mix and product margin. Dollar Tree's sales continue to be negatively affected by the global helium shortage. This directly affects balloon sales, but also has a halo effect on the entire party department. In general, stores with helium are comping positive in the party category, while those without helium are running negative comps. The delta is a 10%-plus comp differential in one of our largest high-margin discretionary categories. Our over-the-counter categories are being negatively affected by our supply chain challenges. This is creating a higher level of out of stocks in this category. We plan to continue to increase our investment in payroll in our stores in the back half. The labor market remains dynamic, and we are proactively addressing select markets to attract and retain associates. We are making investments in our stores and distribution centers through repairs and maintenance as well as compliance programs to ensure a great shopping and working environment. Based on these factors, diluted earnings per share for the full year is now expected to range from $7.10 to $7.40. This represents a $0.75 per share adjustment to the prior outlook based on the midpoint and is comprised of the following components. Roughly 60% of the change relates to the price investments at Family Dollar. An estimated 20% of the change relates to the margin impact of the mix shift towards needs-based consumables, projected to be a 300 basis point shift at Family Dollar and a 150 basis point shift at Dollar Tree in the back half. Again, the majority of this impact is expected to be on the Family Dollar side of the business. We are experiencing some degree of inflationary-related product cost increases, especially in lower-margin consumables, primarily at Dollar Tree, contributing to approximately 15% of the guide adjustment. As we have for decades, we have the ability to alter or reassort product based on cost changes, but this can take a few quarters, hence the near-term profit impact. And a small component of the guide adjustment relates to other items, including our commitment to improve store conditions. As a result of the aforementioned factors, most notably our accelerated price investment, we are expecting Family Dollar to be approximately breakeven from a segment operating margin perspective in the second half, down from its first half margin of approximately 2%. Consolidated net sales for the year are now expected to range from $27.85 billion to $28.10 billion with slightly higher comps offset by slightly reduced square footage growth relative to prior guidance. We expect to deliver a mid-single-digit comparable store sales increase for the year comprised of a high single-digit increase in the Dollar Tree segment and a positive increase in the Family Dollar segment. Selling square footage is expected to grow by approximately 3.5%, down slightly from prior guidance due to the supply chain delays related to procuring equipment and fixtures for store openings. For Q3, we estimate consolidated net sales will range from $6.75 billion to $6.87 billion based on a mid-single-digit increase in same-store sales for the enterprise. Diluted earnings per share for the quarter is expected to be in the range of $1.05 to $1.20 per share. Other considerations for our updated 2022 outlook include the following. Net interest expense is expected to be approximately $31 million in Q3 and $125 million for the year. Our outlook assumes a tax rate of 23.6% for the third quarter and 23.8% for fiscal 2022. Weighted average diluted share counts are assumed to be 224.8 million shares for Q3 and 225.4 million shares for the full year. Our outlook does not include any share repurchases. As of July 30, we had $2.25 billion remaining in our existing share repurchase authorization. And I'll now turn the call back over to Mike.
Michael Witynski:
Thanks, Kevin. As we continue to navigate through this dynamic and somewhat uncertain environment, we are excited about the continued progress at Dollar Tree and the material positive changes beginning to be made at Family Dollar. At Dollar Tree, as it relates to our multi-price offering, the team is continuing to refine the $3 and $5 assortment and testing various concepts to enhance the program and build on the very positive long-term impact from our multi-price offering.
For example, test of multi-price frozen foods are driving exceptional sales productivity as the new offering is delivering tremendous value and meeting family portion needs such as frozen meals, pizza and ice cream. At Family Dollar, our Combo Store initiative continues to drive improved store performance at very attractive levels, in line with previous commentary. In fact, we are now exploring various sizes and formats in other markets beyond our rural target locations, pursued in our first iteration of the concept.
Some of the initiatives to improve the business will take more time to produce an impact, notably in the supply chain and technology. That said, at Family Dollar, the work being done by Larry Gatta's merchandising and marketing teams has been remarkable and is beginning to be actioned upon more urgently. In fact, we have made a number of enhancements to our H2 strategic store format. We refer to the new version as H2.5. Among the changes made to improve store productivity, customer satisfaction and to better support our store associates through efficiencies include:
adding a linear footage, developing seasonal assortments as a focal point, utilizing deeper shelving on key consumable categories to enhance store efficiencies and improve in-stocks, expanding the direct-to-store delivery offering, enhancing space dedicated to snacks and increasing the beverage offering and optimizing the frozen food assortments.
At our Leadership Summit, the merchandising team shared the field leaders a wide array of consumables and discretionary merchandising initiatives to drive traffic and sales at Family Dollar. Our marketing teams are currently focused on 4 key initiatives:
refreshing Family Dollar's brand positioning, evolving to a more productive ad program, relaunching our Smart Coupon program and expanding our Boys & Girls Clubs of America partnership to be a good partner in the communities that we serve.
We believe that these key initiatives are beginning to have an impact, and consumers are increasingly looking to our stores to meet their needs. We believe the time is right to accelerate actions to better serve customers by providing an exceptional value proposition. We will go into more details on these initiatives and broader plans to transform Family Dollar and continue delivering great success at Dollar Tree in the quarters ahead and at our Investor Day in the spring of 2023.
And I want to briefly share a few initiatives that Bobby Aflatooni's IT team are focused on to provide better support for our stores. These include:
improving DC and store in-stock service levels through refinement of our demand forecasting, allocation and replenishment systems for both banners; improving customer satisfaction and driving through enhanced ability to support more complex promotional offers, such as buy a product A and get a discount on the product B; supporting field leadership and store efficiencies with improved labor systems; and enhancing our enterprise-wide data integration platforms.
Before we go into Q&A, as I had previously announced, Kevin will be transitioning out of his role as Dollar Tree's CFO. Kevin has been instrumental in the company's growth and success since joining the organization in 2008. During Kevin's tenure, Dollar Tree has grown from 3,600 stores to more than 16,200 stores, from annual sales of $4.6 billion to more than $26 billion and from annual operating profits of $365 million to more than $1.8 billion. When Kevin joined Dollar Tree in December 2008, shares were trading at a split adjusted price of just $13 or $14 per share. I would like to publicly thank Kevin for his commitment, stewardship and significant contributions to Dollar Tree and its stakeholders over the last 14 years. Operator, we are now ready to take questions.
Operator:
[Operator Instructions] We'll take our first question from Chuck Grom with Gordon Haskett.
Charles Grom:
Rick, I'm curious, since you joined the company 90 days ago, what have been the biggest surprises for you, both positive and negative? And when you talk about steps to improve the store standards at Family Dollar and the DC network across both banners, can you elaborate a little bit more for us? And do you see any offsets in the P&L to help fund those actions?
Richard Dreiling:
Yes, I'll start here and then turn it over to Michael. The positive, I have to tell you, the enthusiasm within the organization, and its willingness to embrace change. The interesting thing has been, there's not a lot of things we're talking about that people, Chuck, aren't shaking their head, yes, let's go get it done. So that, to me, is the foundation of this. And the company has made a major commitment to culture enhancement. In fact, we spent our near whole day just talking about how to manage people and how people need to be managed. And we spent a whole day just listening to people to hear what they're dealing with.
Probably on the negative side, the pricing gap was a little bit larger than we thought. And we also believe this is a great time for customer trial, and we want to be right on our pricing. In terms of the supply chain side, we're looking at everything in the supply chain. We are assembling, I think Mike would agree, probably one of the best supply chain teams in the country. We have a lot of distribution centers that need to be updated and modernized. So we're feeling really good on how we're approaching that. The IT side, information technology, I might classify as a little bit bigger surprise in that there's a lot of basic things that the operators and the merchants need and the supply chain needs. So with that, Mike, I don't know if you want to add anything?
Michael Witynski:
No, I think Rick said it right. On the store side, I think the biggest thing is, is we're focusing the entire organization from a culture perspective on doing everything that we can do to make our store associates successful and enabling them to run better, cleaner, fuller stores. And we've -- I said -- I shared in my opening that we're here right now from our summit with -- every district manager in the country is here, and we are all aligned behind driving better store conditions.
And that's going to entail in your question is, yes, we're going to continue to invest, and as Kevin said, into our property management and in everything we need to, to make sure our store conditions are the way -- to our standards for our customers, and we're committed to do that. And more importantly, our associates are enthusiastic, not only about the culture of supporting them and putting them at the center of everything that we do. But then they see the proof points of we're investing in pricing, we're improving our logistics. Larry is improving the merchandising, and they're seeing better assortment, more linear footage where the customers shop. And then I think Rick nailed it on the supply chain. We're doing everything we can and turning all the leaves over to drive efficiencies and improvements and really ultimately to supply our stores more efficiently with the product they need and when they need it.
Operator:
And we'll go ahead and move on to our next question from John Heinbockel with Guggenheim Securities.
John Heinbockel:
I want to drill into pricing and investments at FD here, right? So how do you think the maturity of the price investments will play out, right? Immediately, it's deflationary, right, to comp until people recognize the benefit then traffic picks up. How does that play out? Is it more challenging in an inflationary environment to change your price perception? And then do you think most of the investments at FDO will be limited to '22, right? Or do you think there's a bunch that -- other than just a wraparound, a bunch that will occur in '23 as well?
Michael Witynski:
Yes. Thanks for the question. And like I said earlier, the time is right, right now. And the reason we really looked at it is because we saw new customers shifting our way. In this inflationary environment, we think it's a perfect time to really change the customer's perception and what they're seeing in our stores because we're getting new customers and new eyes in our stores and our existing customers. They're feeling pressured like they never have before.
And in this inflationary environment, with the customer's wallet stretched, our consumers are relying on our stores to meet their budget goals. And we're seeing good demand trends. So this was really an ideal environment to begin to move more quickly than we previously anticipated to more fully meet the customers' value expectation, close the pricing gaps and win them as customers long term in this inflationary budget. We think the time was right. We -- initially, we talked about it in our outlook, and we were going to do this over time, starting with, of course, our KVIs, the known value items. But then just as we saw the dynamic environment, the pressure on our customers and the inflation, we decided that now is the time to win these customers for the long term and get it right. And to your question, it's now. It's -- we are -- like I said, we are in the best price position in over 10 years to the competitive market. So we're there. Now it's just managing it from here. And getting right on our promotions. And Larry is going to continue rocking the H2.5 in the assortment. So we're in a great place right now.
Operator:
And we'll go ahead and move on to our next question with Matt Boss from JPMorgan.
Matthew Boss:
So at the Dollar Tree banner, what was the cadence of top line trends during the second quarter? Any color on August or just drivers of confidence in holding high single-digit performance in the back half? And then on Dollar Tree banner gross margin, could you just touch on any puts and takes in the back half of the year to consider and how you're thinking about multiyear gross margin at the Dollar Tree banner?
Michael Witynski:
Yes. Thanks for the question. And as I shared, it was pretty stable throughout the summer at Dollar Tree on our comp, 6.5% to 8.5%. And remember that -- and Dollar Tree really does well around the seasons. And in the second quarter, the biggest season is graduation. And you heard Kevin say we were really impacted by helium supply in one of our largest categories. That really has a halo effect over party. So largest category, most profitability for Dollar Tree. So that was one of the impacts.
On the good news, the other big season is lawn and garden, and lawn and garden season was one of the top 5 categories. So when we had the product, our customer is responding very, very well. And then the other categories that did well is, as Kevin said and I said, the shift to consumables, and our merchants reassorted and reinvested in the consumable items to drive traffic. The other top 5 categories, again, were beverages, candy, snacks and cookies and food. So our customers are responding very, very well. And early in -- it's really early into Q3, but we see so far this month trending better than Q2 at Dollar Tree and Family Dollar both. And as you think about the margins in the back, where we're at -- as Kevin shared, our inventory is up. But remember, this time last year, we had thousands of containers at origin, meaning it wasn't even at our system. It wasn't even at the origin yet. So now all that is in our system. We're getting our seasonal on time. And it's also -- remember, our merchants at Dollar Tree bought for the back half at the $1.25. The product is amazing. All of our district managers, regional directors, all of our field associates are here with us right now. And they see the exciting items, and they're thrilled. A, we've got the product when we want it; and B, newly assorted $1.25 will blow the market away, and our customers are going to respond well. And we're very excited about it. Kevin can kind of touch on some of the margin puts and takes in the back half.
Kevin Wampler:
Yes. As you look at it, Matt, obviously, as we talked this year, freight, which was a big headwind last year, and to the first half of this year, we said it would still be a headwind as we annualized last year rates, and we've said that into the back half, then it starts to level out. We still see that. Obviously, with -- if diesel continues to move down, that will be helpful as well. But again, I think as you look at the Dollar Tree gross margin rate, I think Q3 will be a little lower than Q2, but then you'll see it pop back a little bit in Q4, which is highly discretionary quarter for us. So that's kind of the trend you'll see.
As I think about the multiyear gross margin, as you think about it, again, looking to build traffic, looking to -- as we build the -- again, really changing the stores. We now have 2,000 Dollar Tree Plus stores as we look at, again, continuing to further the assortment of the $1.25 price point. And then would look to see that the freight rates do start to come down and have an effect in next year. So there are some things that will play into that. A little early to really talk specifically. But I think those are kind of the moving pieces as we see them.
Operator:
We'll go ahead and move on to the next question from Robby Ohmes with Bank of America.
Robert Ohmes:
I was hoping we could get a little more color. I think you mentioned trade down. And maybe some more discussion about the environment. The transactions were up at Walmart, Target and warehouse clubs. And I was just curious why the transactions are so much stronger versus being down at Family Dollar and Dollar Tree and if we should expect some improvement in the transactions.
Michael Witynski:
Yes. We expect improvement in our transactions, especially as -- the pricing moves that we've made, the assortment changes that Larry Gatta and the merchants are making and bringing in some new adjacencies and our seasonal product that we have ready. Just a little pressure -- as you said, our customer is pressured like none other. And the good news is, is we're excited. We see third-party data that we do have a lot of new customers coming into both banners over last year. And the majority of them are at a household income of $80,000 or higher. So we feel good about that. We also see a huge shift from cash into credit, which tells us the customer is pressured.
And then inside the store, when they get in there, we've seen in the industry where private brands have outpaced national brands for 24 weeks in a row now, 24 weeks in a row. That hasn't happened in the last 5 years, that private brands has outpaced national brands. And that's the customer trying to stretch their dollar and manage their budget. And Larry and the team are working hard on our private brands, and we're seeing the same change inside of our store. And then they're even making decisions on form and function. We see them moving from liquid to powder detergent. We're seeing them even go without softener -- liquid softener in detergents. They're just choosing not to have softener. And those are the things that our customers are -- and the decisions they're making. And we think right now, with the price investments and the changes that Larry is making and our new assortment at Dollar Tree, we're in a wonderful position to meet their needs in 16,000 stores conveniently located where they don't have to drive far. We'll meet their needs, and we're excited about it going forward.
Operator:
We'll take our next question from Scot Ciccarelli with Truist.
Scot Ciccarelli:
Scot Ciccarelli. So I wanted to revisit the question that I actually asked last quarter. So we know that, in general, retail turnarounds take longer, costs more than what people generally expect. And last quarter, when I asked about that, your comment was that for the investments for '22, it was all embedded in your outlook. So given the change this morning and the fact that you've now had more time to evaluate the improvements that need to be made, do you have a better view of how much more investment may be needed to get Dollar Tree and Family Dollar where you want them from an operational and technological standpoint?
Michael Witynski:
Yes. And Bobby is -- that's a great question. And our team is forming right now. And I think from an OpEx perspective, we're going to continue to invest in labor where we need to. And there will be payroll investments going forward. For this year, as far as we can see with the dynamic markets going on, it is embedded in our forecast.
From the IT and supply chain, I think those are the 2 big ones. And what Bobby is looking at right now, the good news is, and I think Rick mentioned it, Bobby knows every one of our systems. And he knows exactly what he needs to do because he's done this before at other retailers, and he's worked with the 2 executives in supply chain and merchandising. So Bobby is working really hard. And I will owe you that number probably up in the spring when we have our Investor Day because that is going to be a longer-term outlook, and the majority of it is going to be in CapEx. And then the same thing with supply chain. We're looking at what is the best way to deliver to our stores, what's the most efficient way to use our network to deliver our Combo Stores, our Dollar Tree Plus stores and, of course, our traditional Dollar Tree and Family Dollar stores. And John is working on that now and modeling it out, and we'll probably have more information on the spring as the -- as we have more knowledge from the 2 leaders. Our CFO that we just announced is going to be coming on board and will certainly have a say in it and will want to look at it. But those are the 2 big investments. But in our OpEx and in our forecast, from a repair and maintenance and store conditions perspective, we have those embedded in, and we will probably come back to you if there's any other longer-term initiatives that will impact that.
Operator:
We'll move on to our next question from Simeon Gutman with Morgan Stanley.
Simeon Gutman:
It's Simeon Gutman. For Mike and Rick, this is maybe more theoretical on timing and sequencing. It looks like '23 may end up being more transitional, and that's part one of the question. Is that fair? Because some of these price investments will continue and then we're going to lap some of the multi -- or the breaking the buck at the tree. So if that's a fair assumption, how do you think about maybe speeding up investments, layering -- leaning in, I guess, for '23 to clear the path for '24?
Michael Witynski:
Yes. And in theory, I think you're right. But our pricing investment is in, and then we're just going to manage that going forward on that side of it. I think we will lean in on our investments on supply chain and IT, but these are things that take time just because of the amount of systems that you are touching. And as Rick said, it's our -- as our store and retail systems, as our supply chain systems and then our merchandising systems. So that will take time, and we will stage that over our capability.
And then the supply chain will be -- as we roll out and open new distribution centers, that's when we will continue to rightsize our network and make decisions going forward. So we will continue to move with speed that will give us the highest return as quick as possible.
Operator:
We'll take our next question from Kate McShane with Goldman Sachs.
Katharine McShane:
It looks like the elasticity response improved again sequentially with the $1.25 change. Just wondered what your expectation for the response is for the second half and if that's changed meaningfully from what you were thinking when we last spoke to last quarter.
Michael Witynski:
Yes. No, I think the biggest change is the dynamic of the marketplace and the huge shift from discretionary to consumables, not the shift about our $1.25. We did some in-depth customer research and customer intercepts about Dollar Tree at the beginning of the quarter. And we really wanted to dig into our brand and the assortment and in-store experience. And I was shocked. Not one of them brought up price. Not one of them brought up the $1.25.
They were all focused on clean, new assortments, seasonal and the service of the -- what they have when they're in the stores. So I think the customers move beyond that because as we tested early on, they understand value more than ever. And in today's dynamics, they see that $1.25 is an exceptional value. That's why all these new items and consumables are all taking off. And why I'm excited about the back half -- and to your point, the second quarter did not really have any big season. Dollar Tree is all about the seasons. We change like the leaves on the trees. Well, in the summer, the leaves aren't changing because you've got lawn and garden and then you've got graduation, and graduation was impacted by helium. On the back half, Kevin said we've got 2,000 -- 2,100 actually, Dollar Tree Pluses that we didn't have. So that's going to be -- that's exciting about the back half. And then our inventory. We've got all of our seasonal inventory at $1.25. And they will rally around this seasonal merchandise, just like they did in the first quarter with Valentine's and Easter. We expect some exciting things and great response from our customers because we're in a great inventory position. The value is spectacular. And then on the basic side, we've answered that on the consumables that we didn't have last year at this time. So I'm pretty excited about the back half of Dollar Tree.
Operator:
We'll go ahead and move on to our next question from Scott Mushkin with R5 Capital.
Scott Mushkin:
So I just wanted to get into a little bit more about labor, some of the comments you said about labor and the labor competition and what kind of pressure that might put on you as you try to get that more where you want it to be.
Michael Witynski:
Yes, Scott, and thanks. Early on, we shared that we're investing over $195 million, just under $200 million in our payroll, the majority of it in our store associates and some of it in our DCs. We feel really good where we're at in our distribution centers. We've got all of our roles filled compared to this time last year where we didn't have open positions. We are continuing to invest in markets in the stores and at retail stores, and we will continue to do that where we see the need.
Looking out over the back half of the year, where we need to make adjustments is already in our forecast. So it's a dynamic environment. Now people are coming back to work a little bit just because of what's going on in the economy. So I think that's going to shift a little bit, but we will continue to invest where we need to. And so far, in the next 6 months, looking for the rest of the year, we have what we need to invest in the forecast.
Operator:
We'll take our next question from Michael Montani with Evercore ISI.
Michael Montani:
Just wanted to dig into a little bit further, if I could, the top kind of 2 to 3 drivers of traffic for both banners moving forward and kind of what the realistic time line to anticipate the shift. Obviously, there's pricing actions you're doing at Family Dollar, but then prices have gone up at Dollar Tree. So just kind of talk about, if you could there, Rick and Mike, what gives you the confidence and what's the time line to get those things turned up?
Kevin Wampler:
Well, go ahead.
Michael Witynski:
Yes, I was just going to say, I just got done saying the excitement on the Dollar Tree side. Our assortment and the investments we've made into the new $1.25 on the consumable side is driving traffic. And just to put that in perspective, we haven't seen that kind of improvement in consumables, which drives traffic since pre pandemic. So that's our investment, and that's how we're driving traffic, along with the unbelievable assortment coming up that they're going to see inside our store for the seasons coming up. Unlike anybody else, Dollar Tree -- the $1.25 is the best value, the best wow and the most excitement.
And then on the Family Dollar side, this pricing, again, we just put ourselves in a position to be the best price to the market in over 10 years. That alone will drive traffic, not even mentioning what Larry Gatta and the merchants are doing with enhancing our H2.5 with a tighter assortment, more meaningful prices, take advantage of more linear foot, so getting more product on the shelf that the customer is looking for. And then getting seasonal upfront and center. So I'm really excited about the moves that we've made. Now as you know, it takes time for the customer -- we've got new customers coming in that are recognizing it. And then over time, we will see and get credit for being priced right, better assortment, better position on the Family Dollar side. And Larry's -- and I mentioned purposefully on marketing, we've got 4 great marketing perspectives going on with our digital marketing, with our print ad, and Larry is really working on exactly what do we need to advertise that the customer responds to that drives traffic. So those are all the levers that the merchants and Larry are pulling on the Family Dollar side, and I'm just thrilled about what we got going on, on the Dollar Tree side to keep growing.
Operator:
And our last question comes from Michael Lasser with UBS.
Michael Lasser:
So Rick, you've been around the value retail space for a long time. Presumably, you came in and over the last 90 days, you said, look, we need to get Family Dollar price perception at a better spot in order to realize the full potential of this asset over the long run and we have this opportunity because Dollar Tree gross margins are expanding, and we can use that expansion to fund investments at Family Dollar. So now the question is, with Dollar Tree exiting this year at a 37% to 38% gross margin rate and Family Dollar exiting this year with a low 20s gross margin rate, can Dollar Tree sustain the 37% to 38% gross margin rate over the long run? And can you rebuild Family Dollar's gross margin rate over the long run in order to generate a suitable return on these investments?
Richard Dreiling:
I think the answer to that is we're very comfortable with where we are on the gross margin in Dollar Tree for the back half of the year and going forward. And I will say we are working our way with the vendor community, with vendor support, and we anticipate that the Family Dollar margin will improve over time.
Operator:
And with that, that does conclude our question-and-answer session for today. I would now like to hand it back over to our presenters for any additional or closing remarks.
Randy Guiler:
Great. Thank you, Ali. Thank you for joining us for today's call. Our next earnings call for Q3 is tentatively scheduled for Tuesday, November 22. Thank you, and have a good day.
Operator:
With that, that does conclude today's call. Thank you for your participation, and you may now disconnect.
Operator:
Good day, everyone. Welcome to the Dollar Tree, Inc. First Quarter 2022 Earnings Call. Today's conference is being recorded.
At this time, I'd like to turn the call over to Mr. Randy Guiler, Vice President, Investor Relations. Please go ahead, sir.
Randy Guiler:
Thank you, Alan. Good morning, and welcome to our call to discuss results for Dollar Tree's First Fiscal Quarter 2022. With me on today's call are Executive Chairman, Rick Dreiling; President and CEO, Mike Witynski; and CFO, Kevin Wampler.
Before we begin, I would like to remind everyone that various remarks that we will make about our 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. These statements are subject to risks and uncertainties, and our actual results may differ materially from those indicated in these forward-looking statements. For information on the risks and uncertainties that could affect our actual results, please refer to the Risk Factors, Business and Management's Discussion and Analysis of Financial Condition and Results of Operations sections in our annual report filed March 15, 2022, our Form 10-Q for the most recently ended fiscal quarter, our most recent press release and 8-K and other filings we make from time to time with the Securities and Exchange Commission. We caution against reliance on the forward-looking statements made today, and we disclaim any obligation to update or revise these statements, except as required by law. Following our prepared remarks, Mike and Kevin will take your questions. [Operator Instructions]. And before I turn the call over to Rick, I want to make one quick clarification to our earnings release as I've received a few questions this morning. Our original fiscal 2022 EPS outlook of $7.60 to $8 per share did not include the $0.43 per share of cost outlined in today's earnings release. $0.13 of the $0.43 per share was incurred in Q1 and reduced our Q1 earnings. Our updated outlook for EPS of $7.80 to $8.20 per share does include the $0.43 per share of cost. And I'll now turn the call over to Rick.
Richard Dreiling:
Thank you, Randy, and good morning, everyone. It's been an extremely busy 10 weeks since joining the Dollar Tree team. I've been actively meeting with the leaders throughout the organization to get to know them and their businesses and to discuss priorities and opportunities. We see a massive opportunity ahead of us to drive long-term sustainable value creation through the combined Dollar Tree and Family Dollar brands. It's abundantly clear to us that to deliver this long-term opportunity, we're going to be going from a great company and that change is needed.
We are fully committed to transform Dollar Tree from a good company today to a great company tomorrow. We have this unique opportunity to become a growth engine that delivers profitable growth with attractive returns on capital for many years to come. However, to get from here to there, we must build the foundation to fuel this engine. We need to invest in the areas that most positively impact the associate and shopper experience. These investments are intended to greatly improve the performance of the Family Dollar segment and our supply chain as well as support the continued momentum at Dollar Tree. We'll be focusing on our people, most importantly, our teams from store and distribution center associates to field leadership through competitive wages, improved store and DC conditions and enhanced safety. The distribution center network and supply chain presents us with a golden opportunity to amplify efficiencies and deliver greater support to our stores and elevated service to our shoppers through improved in-stock positions. Pricing at Family Dollar and the value proposition at both banners, we need to be right on price at Family Dollar, on par with our primary competitors, and we will work directly with our suppliers to drive greater store productivity. Dollar Tree has a long history of exceeding customer expectations by offering extreme value. We will continue to place a great emphasis on the value proposition at Dollar Tree. And finally, technology. We are simply not where we need to be from a systems perspective to reach our potential. We have recently begun a comprehensive review of all of our systems and infrastructure to make the right decisions and investments to take Dollar Tree and Family Dollar to the next level. I felt great about the long-term opportunity for Dollar Tree and Family Dollar before I got here. Now that I've been inside the organization for 2 months, I feel better than ever. I have full confidence in the team and our Board of Directors as we embark on this much needed transformational growth journey. The Dollar Tree banner is generating renewed momentum, and we will be taking the necessary steps to enable Family Dollar to seize the opportunity to deliver long-term operating performance improvements. We are in the midst of a very challenging time for consumers as many are living paycheck to paycheck. They are facing the highest inflation since the early 1980s, record high gas prices, the effects from the pandemic, geopolitical uncertainty and much more. In tough times, value retail can be part of the solution to help families stretch their dollars to meet their evolving needs. Dollar Tree and Family Dollar provide convenience as our 16,000-plus stores are located close to millions of households to live and work. Mike and I view our organization as a growth company. Now is the ideal time to shift gears for us to make change happen to unlock shareholder value and enable the next wave of profitable growth for Dollar Tree and Family Dollar. With that, I'd like to turn the call over to Mike.
Michael Witynski:
Thank you, Rick. And it's good to have you here with us, and good morning, everyone. Thank you for joining us today. The team delivered a solid start to the year with a 6.5% top line sales expansion, a 19.2% lift to gross profit and a 48.1% increase to earnings per share. During the quarter, the Dollar Tree team successfully completed its conversion to the $1.25 price point, contributing to both sales and margin improvements. Shoppers are responding favorably as the new greater value products hit our shelves.
Importantly, other key strategic initiatives, including the expansion of the $3 and $5 Plus assortment in our Dollar Tree stores, as well as our Combo Stores and H2 renovations at Family Dollar are all working. Rick outlined the types of additional strategic investments we will be making over the next several years that are designed to position the company for improved operating performance and long-term sustainable growth. Before I discuss Q1 performance by segment, I want to share a few details regarding a very eventful quarter for the company. In mid-March, our Board was reconstituted. We now have a new Executive Chair, a new Vice Chair and Lead Director -- Lead Independent Director and a total of 7 new directors. We also have 2 new Board committees, a Finance Committee and a Sustainability and Corporate Social Responsibility Committee. This week, we published our new 2022 CSR report. I am proud of the progress we are making as a company and the team's effort on sustainability. Please check out the new CSR report in the Corporate Governance portion of our website at DollarTreeinfo.com. Rick and I have been working very closely together. We share a common vision for a long-term growth opportunity for the Dollar Tree organization. That value will be created by a combination of Dollar Tree's unique and resilient business model that is demonstrating its earnings power and momentum with its recent initiatives, along with a material improvement over time, and the operating performance of our Family Dollar banner. We are well underway with plans and priorities to address the performance at Family Dollar. I will share more detail later on this call. Also, 2 weeks ago, we announced the addition of 2 key executives to our leadership team. John Flanigan joined the company as Chief Supply Chain Officer. John brings decades of leadership experience in retail logistics, including grocery, drugstore and the value sectors. John will be extremely focused on elevating our supply chain capabilities through improved distribution operations, hiring and retaining of teams, the efficiency improvements throughout supply chain designed to drive greater store productivity through improved in-stock position. He plans to lead productivity improvements across the logistics function by the use of data analytics, process improvement and automation. Additionally, Larry Gatta has joined the team as Chief Merchandising Officer for the Family Dollar segment. Larry brings more than 35 years of retail merchandising and marketing experience. He is well known and respected throughout the vendor community and will be leading plans to drive our business, and in turn, the business of our supply partners. Larry will be focused on improving Family Dollar's operating performance and productivity through sales-driving initiatives that provide great value for our shoppers. In addition to the investments we are outlining today, components of our transformation were driven by a number of factors, including continuing to enhance our culture, elevated store standards, better use of private brands, improved category adjacencies, enhancing our product mix, optimizing our vendor partnerships and many, many more. To some degree today, and especially in the quarters ahead, you can expect to receive more details, improved transparency and greater management engagement in shareholder communications as we progress on our plans to improve the operating performance and reassess the long-term opportunities for the company. We are currently in the process of planning an Investor Day targeted for October time frame.
Now to Q1 performance. The Dollar Tree banner delivered its strongest quarter in company history. Among the highlights:
an 11.2% comp, the best quarterly comp performance in more than 20 years, which is including our largest sales day ever, which was the Saturday before Easter; a 40.6% gross profit margin, nearly 700 basis points above the prior year's quarter; and a company record 20.2% operating margin, more than 800 basis points over Q1 of last year.
Margins in Q1 did receive an outsized temporary benefit from the initial transition to the new price point as well as selling through the current inventories. We are modeling a moderation of the margin level as we focus on providing our shoppers with new assortments at greater value for the $1.25 price point. The 11.2% comp sales increase was driven by a 15.4% increase in average ticket partially offset by a traffic decline of 3.6%. For the quarter, the discretionary side of the business delivered a strong 14.1% comp increase, while consumables increased 8%. April, which benefited from the later Easter holiday this year, was the strongest month in terms of both sales and traffic. Importantly, we successfully completed the conversion to a primary price point of $1.25 across the chain. Credit to our teams. This project was announced in September of 2021 and was completed by the end of February with minimal disruption. By the end of Q1, our customers have already seen more than 960 of our projected 2,000 new greater value product SKUs on the shelves. Our shoppers are responding to the new items. We are seeing much improved results in the categories since rolling out the enhanced offering.
Examples of the consumables category comp improvements where we've put in these new items:
carbonated beverage, from a 3% decline to a 12% increase now; in snacks and cookies, before the new SKUs, we had a decline of 8%, now a 12% increase in comp; and in our food category, from a 10% decline before to now experiencing a 2% increase. The majority of the changes at this early stage are now traffic-driving consumable side of the business. The discretionary changes will occur throughout the back half of the year.
The $1.25 assortment changes are notable and easy to see when you visit Dollar Tree stores. In today's environment, where consumers are seeing higher prices everywhere, shoppers know they can rely on Dollar Tree as their destination for extreme value and evolving meaningful assortment and a thrill of the hunt. The Family Dollar banner had a big hurdle to climb in Q1. In 2020, Family Dollar had a 15.5% quarterly comp increase at the onset of COVID. And in last year's quarter, there was a record release of stimulus dollars that positively impacted both top line sales and margin with the lift in discretionary sales. For Q1, Family Dollar's comps declined 2.8%, which represents a nearly 10% comp since 2019. The 2.8% comp sales decrease was comprised of 3.7% decline in traffic partially offset by a 1% increase in average ticket. For the quarter, the consumable side of the business delivered a 1.2% comp increase, while discretionary comps were down 14.7% as we cycled the massive release of stimulus dollars last year. February represented the best comp month for the quarter, and April was slightly better than the quarter's comp. Importantly, Family Dollar's comp sales for the quarter were negatively impacted by an estimated 200 basis points by the temporary closures of approximately 400 Family Dollar stores served by our Arkansas distribution center. All of these stores have now reopened. Last week, we announced that we will be closing the 30-year-old West Memphis, Arkansas distribution center that we have deemed is no longer part of our go-forward strategy. We are working closely with the impacted associates to support them with their transitions by providing severance plans to those eligible, helping associates with opportunities in our other distribution centers and in our stores as well as providing outplacement services and employee assistant programs. We are reallocating stores to other DCs to fulfill the store deliveries and have sufficient capacity to serve all stores in our remaining fleet of distribution centers. We appreciate the hard work and support of West Memphis associates committed during the transition process. I will now hand the call over to Kevin to provide more color on Q1 and our updated outlook.
Kevin Wampler:
Thanks, Mike, and good morning. For the quarter, consolidated net sales increased 6.5% to $6.9 billion comprised of $3.78 billion at Dollar Tree and $3.12 billion at Family Dollar. Enterprise same-store sales increased 4.4% despite cycling the large outflow of stimulus from the prior year's quarter. This represented a 190 basis point sequential improvement from Q4.
Costs for the Dollar Tree segment increased 11.2%. Family Dollar same-store sales decreased 2.8%. And on a 3-year stack basis, Dollar Tree is at a 15% comp, and Family Dollar is at a 9.9% comp. Gross profit improved 19.2% to $2.34 billion for the quarter. Gross margin was 33.9% compared to 30.3% in the prior year's quarter. Gross profit margin for the Dollar Tree segment increased 690 basis points to 40.6% compared to 33.7% for the same period last year as a result of the net of the following. Merchandise costs, including freight, decreased 590 basis points, primarily due to increased initial mark-on and increased sales of higher-margin discretionary merchandise, partially offset by higher freight costs. Occupancy costs decreased 80 basis points from leverage on the comp sales increase. Distribution costs decreased 50 basis points from leverage and higher capitalized balances resulting from inventory increases in the current quarter partially offset by higher hourly wages. And markdown costs increased 30 basis points primarily from markdowns for clearance items as we move to a higher value assortment at the $1.25 price point. Gross profit margin for the Family Dollar segment decreased 100 basis points to 25.8% compared to 26.8% for the same period last year. Markdown costs increased 75 basis points due to higher clearance activity related to the shipping delays for seasonal items and slow-moving merchandise. Occupancy costs increased 45 basis points from deleverage from the comparable store sales decrease and higher real estate taxes. Shrink increased 25 basis points for more favorable inventory results in relation to accruals in the prior year's quarter. These increases were partially offset by distribution costs that decreased 15 basis points, primarily from higher capitalized balances from inventory increases, partially offset by our higher hourly wages. And merchandise costs, including freight, decreased 35 basis points primarily due to higher initial mark-on, partially offset by higher freight costs and higher sales of lower-margin consumable merchandise. Consolidated selling, general and administrative expenses as a percentage of total revenue increased 100 basis points to 23.3% compared to 22.3% in Q1 last year. For the first quarter, the SG&A rate for the Dollar Tree segment improved 120 basis points to 20.4% when compared to the prior year's quarter. Payroll costs improved 100 basis points from leverage on the 11.2% comp partially offset by hourly wages and investments in store payroll. Facility costs improved 25 basis points from leverage. Depreciation costs decreased approximately 10 basis points, partially offset by other SG&A, which increased approximately 15 basis points resulting from higher store supply costs. For the Family Dollar segment, the first quarter SG&A rate as a percentage of total revenue increased 280 basis points to 23% compared to 20.2% in the prior year's quarter. Payroll expenses increased 90 basis points primarily due to hourly wage and investment in store payroll as well as deleverage on the comp sales decline. Other SG&A expenses increased 85 basis points due to asset impairment for the West Memphis DC, along with higher store supply expenses for store projects and higher legal fees. Store facility costs increased 65 basis points primarily from costs associated with removal of product from stores in connection with the voluntary product recall as well as deleverage on the comp decline. And depreciation and amortization increased 40 basis points due to increased depreciation related to capital expenditures for store renovations and improvements. Corporate, support and Other expenses as a percentage of total revenue were 1.8% compared to the prior year quarter of 1.4%. The higher costs related to increased legal fees, including the reconstitution of our Board, and incentive compensation. Operating income improved 40.7% to $731.5 million or 10.6% of total revenue in the first quarter. Nonoperating expenses totaled $34 million comprised of net interest expense, and the effective tax rate was 23.1% for both the current and prior year's quarter. Net income for the quarter improved 43.2% to $536.4 million or $2.30 per diluted share, which includes $0.13 per share for costs related to the West Memphis DC. This compared to net earnings of $374.5 million or $1.60 per diluted share in the prior year quarter. Looking at the balance sheet. Combined cash and cash equivalents at quarter end totaled $1.22 billion compared to $985 million at the end of fiscal 2021. Outstanding debt as of April 30 were $3.45 billion. The company repurchased approximately 90,000 shares in Q1 for approximately $14.2 million under the share repurchase authorization. Compared to last year, inventory levels at Dollar Tree are up 39% due to increased capitalized freight costs plus Dollar Tree Plus inventory and a catch-up in past due inventories. Inventory levels at Family Dollar increased 27% compared to [indiscernible] last year due to increased capitalized freight and an increase in the average unit cost. Both banners have less average inventory units in store than at the same period in 2019 pre-pandemic. Capital expenditures were $253.4 million in the first quarter versus $224.9 million in Q1 of last year. And for fiscal 2022, we currently expect that consolidated capital expenditures will be approximately [indiscernible], slightly higher than our initial outlook for the year based on additional supply chain projects and construction cost pressures. Depreciation and amortization totaled $188.9 million for Q1 compared to $172.7 million in the first quarter of the last year. And for fiscal 2022, we expect consolidated depreciation and amortization to be approximately $770 million.
In March, our initial outlook for fiscal 2022, diluted EPS was a range of $7.60 to $8. We expect to incur costs totaling an estimated $0.43 per share, which were not included in our original outlook. These costs represent:
in Q1, $0.13 per share for asset impairment and the product recall costs related to our West Memphis DC; for Q2, an estimated $0.22 per share for lost sales, freight, merchandise disposal, payroll and legal costs associated with the West Memphis matter; and for full year fiscal 2022, a total of $0.08 per share for stock compensation expense related to an option grant issued to our new Executive Chairman.
Diluted earnings per share for the full year is now expected to range from $7.80 to $8.20, which includes the $0.43 of costs I've just outlined. Consolidated net sales for the year are now expected to range from $27.76 billion to $28.14 billion compared to our previous range of $27.22 billion to $27.85 billion. We expect to deliver a mid-single-digit comparable store sales increase for the year comprised of a high single-digit increase in the Dollar Tree segment and a more or less flat comparable store sales in the Family Dollar segment. Selling square footage is expected to grow by approximately 3.9%. For Q2, we estimate consolidated net sales to range from $6.65 billion to $6.78 billion based on a low to mid-single-digit increase in same-store sales for the enterprise. Diluted earnings per share for the quarter is expected to be in the range of $1.45 to $1.55 per share, and this estimate includes approximately $0.24 per share for costs for the West Memphis matter and stock compensation expense. Considerations for our updated 2022 outlook include the following. We anticipate that we will continue to experience uncertainty related to inflation, the global supply chain and geopolitical factors. For example, we have seen diesel costs continue to rise, and natural gas price increases are affecting utility costs throughout the business. We are once again experiencing shortages in the availability of helium and have not been able to procure the volume [ to fulfill our ] needs, which will negatively affect balloon sales. Our outlook includes our best current estimates of pressures from these factors. We cycled the third round of stimulus checks that totaled an estimated $386 billion in March of 2021. In Q2, we will begin cycling the monthly advance Child Tax Credit payments that began in mid-July of 2021. We noted that our original outlook in March that we expected to invest $195 million in store and DC associate wages in 2022. As an update, given the competitive retail environment, we expect that we will likely exceed this amount as we invest in our associates. Import domestic freight will present cost pressures due to annualization of fiscal '21 rates in the first half of 2022. As noted in March, we plan for diesel fuel prices to be higher this year. We have increased the forecasted amount for the remainder of the year based on the current market. Additional color for the year regarding our expectations include, for the enterprise, we are forecasting improved operating margin for the business driven by gross margin improvements, partially offset by higher SG&A costs as a percentage of total revenue. The Dollar Tree segment gross margin in Q1 included an outsized benefit from the transition to the new $1.25 price point. We expect to see a gross margin moderation from the Q1 level as new greater value assortments are incorporated into the business. The Dollar Tree segment is expected to deliver improved operating margin for the year with gross margin benefiting from its strategic initiatives as well as leverage on SG&A.
The Family Dollar segment gross and operating margins are expected to be lower year-over-year, impacted by the following:
higher costs, including freight and needed investments in the business such as labor and improved store conditions; the impact to product mix as a result of stimulus dollars driving discretionary sales in the prior year; and the impact on sales and expenses related to the West Memphis DC matter.
Net interest expense is expected to be approximately [indiscernible] in Q2 and $123 million for the year. Our outlook assumes a tax rate of 24.2% for the second quarter and 24% for fiscal 2022. Weighted average diluted share count are assumed to be 226.4 million shares for Q2 and 226.5 million shares for the full year. Our outlook does not include any share repurchase. And as of April 30, we had $2.5 billion remaining in our existing share repurchase authorization. I'll now turn the call back over to Mike.
Michael Witynski:
Thanks, Kevin. As Rick mentioned in the opening, we are committed to transform Dollar Tree from a good company to a great company. Our initiatives are working and providing increased profits and cash flow. Rick and I both believe now is the ideal time to accelerate investments focused on driving growth through improved associate and shopper experience while propelling greater efficiencies.
These strategic initiatives will be designed to position Dollar Tree for long-term sustainable growth. And we are going to invest and incur costs associated with making this journey. It's the right thing to do, and this is the ideal time to invest in our future. Again, to reiterate, we will be investing in our associates and our stores, the DC network and supply chain, Family Dollar pricing and the value proposition and our technology. Both Rick and I are committed, aligned and extremely focused. The ability to execute our key strategic initiatives is paying off and setting a solid foundation for improved operating performance and accelerated growth. We believe an -- we delivered an EPS of $5.80 in fiscal 2021. And the midpoint of our guidance range this year is $8, representing a 38% increase. I believe we are at an inflection point to exhibit our earnings power into the years ahead. We are committed to meeting our customers' needs while investing in initiatives that are delivering the best returns. These initiatives, combined with our robust balance sheet, will position us to deliver long-term growth for our stakeholders, associates, customers, suppliers and our shareholders. We all know it is incredibly challenging and uncertain time for the businesses today.
We believe our company offers the following as we manage through these times:
stable and resilient business model that has worked at good times and in bad; a 16,000 store footprint that is convenient for shoppers buying their needs; a tremendous value assortment that helps shoppers stretch their budgets; a strong balance sheet that enables us to invest in our business while enhancing our ability to manage and maneuver through the current environment effectively; a road map to deliver shareholder value through improved performance at Family Dollar and improved supply chain and a continued momentum at Dollar Tree.
We have a fantastic growth story of opening 590 new stores this year alone, driving top line sales growth through key initiatives and, again, an expected 38% year-over-year earnings growth at the midpoint of our range. Operator, Kevin and I are now ready to take questions.
Operator:
[Operator Instructions] We'll take our first question from Matthew Boss with JPMorgan.
Matthew Boss:
Congrats on a nice quarter, and welcome back, Rick.
Richard Dreiling:
Thanks, Matt.
Matthew Boss:
So maybe just a high-level one for you, Rick. I know you've only been back for a few months. But you described the Dollar Tree organization as a growth organization. So maybe just -- is there a way to speak to any potential timing of initiatives across the banners, how you're thinking about the team that you're assembling around you or just even at a high level, the degree of low-hanging fruit that you see across the concepts to drive what it sounds like your goal is sustainable, profitable growth?
Richard Dreiling:
Yes, Matt. I'll throw a little color out here and then turn it over to Mike. We are really taking a good hard look at the entire organization. We're looking at both banners. And the goal here is sustainable long-term growth. And we've got a very good team here, a lot of really solid people, and we're going to supplement them with incremental people that, quite frankly, I've been involved with in my career.
But the -- as I reflect on this, you have 2 great banners. Dollar Tree is incredibly exciting and fascinating to me. It's the true treasure hunt. The work that's been done on expanding multiple price points, I think, has been great. And now what we have to do is focus on the fundamentals of consumable retailing in Family Dollar. And Mike, what would you like to add to that?
Michael Witynski:
Yes. Matt, I just -- on the timing of our initiatives, you can -- the way we're thinking about it, the short to midterm, we'll be definitely investing in our associates in our stores. And we'll be working on that throughout the quarters. And that's embedded in the guidance that we gave as well as in our pricing. One of our key initiatives is to get sharper on our pricing and close that gap to our key competitors at Family Dollar. And Larry is working on that right now, and we'll be laying that plan in over the next several quarters.
The longer-term things that Rick -- for our long-term growth is really leveraging and driving efficiencies in our supply chain. And John Flanigan actually is out in one of our DCs today, assessing those things. And then our IT, and we're looking at all of our systems, especially our supply chain, merchandising and storefront systems. So those are bigger capital items, but they're going to take time as we assess them. And I think over the next 2 to 3 years, you'll see those improvements come into the business.
Matthew Boss:
That's great color. And then, Mike, just at the Dollar Tree banner, could you help break down upside in the quarter on the comp side maybe relative to plan that drove that first quarter performance at Dollar Tree? And just speak to customer reception that you're seeing to the new product assortment or the product changes as now you're bringing in the product that was bought for the higher price point, just as it's been introduced, what you're seeing from the customer front.
Michael Witynski:
Yes. That's the exciting part of it. Our Dollar Tree has got such a great reputation for delivering extreme value, and customers have responded well. Our -- throughout the quarter, units were better. Unit decline was better than what we had planned and expected. Unit decline is around the 10-ish mark. Our -- and we shared our transactions are down a little bit more than 4%. Our average ticket is up 15%. So those all feel good for us. And going through the quarter, we're delivering almost half of the new items, and customers are responding very, very favorably.
And we did -- so the metrics, they're telling us the customers responded. In those categories that we shared, we're seeing -- the last 18 months prior to this change, we were seeing declines in the consumables side and declines in our traffic because of that. But now we reversed in our salty snacks, in our cookies and in our food. And also externally, we've done some more extensive research of a second round in the quarter. And customers are highly likely to continue shopping at Dollar Tree after the price change. 85% expressed strong likelihood to shop, 77% are recommending our stores. So our customers still appreciate that great find, the extreme value and the meaningful assortment for them. So we feel good about where we're at right now and as we're moving forward. We've only got one quarter under our belt and looking downstream, we're excited about the new assortment coming in. And this is going to take a while for us to really reset our assortment and our level of margin as we cycle through the new items coming in then, of course, add it to our import items. That will really take throughout the next year as we're incorporating those into our import buys.
Operator:
[Operator Instructions] We'll next go to Scot Ciccarelli with Truist Securities.
Scot Ciccarelli:
Welcome back, Rick. So retail transformations almost always take longer and cost more than us on the outside tend to anticipate. Can you guys provide any color regarding the magnitude of incremental investments that may be required to get Dollar Tree and Family Dollar kind of where you want them from an operational and technological standpoint?
Michael Witynski:
Well, on the Dollar Tree side, as I've said, we've got a lot of momentum because we've been working on this for quite a while. In fact, in the last 2 years, what I'm excited about is during the 2.5 years of COVID and supply chain disruption, we've come out of this and with 2 formats that we didn't have in 2019. We've got a great Combo Store and we broke the $1 to $1.25, and we were enhancing that with $3 and $5 assortments. So we've got some momentum, and our strategies are working. And our cash flow is strong. We've got a great balance sheet. We've got a new reconstituted Board and with Rick on board and including the new talent that we talked about. So we're in a place where we're coming out of, I believe, the era of COVID with great momentum in our strategies, a great balance sheet, a new Board. And we're going to accelerate our growth. So we're not starting today. We're really going to accelerate this going forward.
So I think on -- as the investments, we will get more detail as we continue to work through this. And that's where we said we're going to have our first Analyst Day in October that we'll be really getting into the more of the nuts and bolts of when to expect as we look at this over the next quarters and years on how we lay that in and the benefit according to -- that goes along with those investments.
Scot Ciccarelli:
All right. So there's no way to necessarily bracket or give a general view in terms of how much incremental investment or operating costs might be required?
Michael Witynski:
No, not right now. We've got everything embedded in our outlook for this year. And then we're working really hard. Both Larry and John are looking at those items as we think about how do the beyond years look, and we'll be sharing that in the future.
Operator:
Next, we'll go to Rupesh Parikh with Oppenheimer.
Rupesh Parikh:
So first, just on Dollar Tree gross margins. I know you indicated that sequentially, you expect them to moderate versus what you saw in Q1. Is there a ballpark level you can help us frame that for maybe Q2 and the balance of the year? And then just any thinking longer term in terms of where their gross margins are for the banner? At 35% to 36%? Or do you think you could do better than that?
Kevin Wampler:
Rupesh, this is Kevin. As we think through this, and obviously, to Mike's point, we're one quarter in, we're still learning a lot as we work through this. There'll be -- so moving pieces as always. The marketplace continues to move as to what investment into the product is going to be necessary to be a value in the marketplace. I would tell you this year, I think at a minimum, we would hope to be to the higher end of that historical range. And if we can be above it, we'll be above it. I don't know that we -- where that will exactly land.
Again, the environment is such that there's enough uncertainty that it's pretty hard to peg given the fact that the newness of the $1.25 price point and some of the things that are going on, on a macro level out there. But it will be a positive in a big way for the overall company.
Rupesh Parikh:
Okay. Great. And then maybe just my follow-up question. Just on the Family Dollar banner, just given the initiatives that you guys plan to make and some of the capital investments over the coming years, do you guys think you can close the gap with your -- I guess, your closest competitor on the operating margin line? Could you get to a high single-digit operating margin within the Family Dollar banner longer term?
Michael Witynski:
Absolutely.
Operator:
Next question will come from the line of Karen Short with Barclays.
Karen Short:
I wanted to try this, just a slightly different angle. So there's obviously been expectations in terms of what your new operating profit margin could look like with all the opportunities that you have at both banners. But as I look at today's press release, everything focuses on investing. So I mean, I wanted to see if you could just triangulate that a little bit. And I mean, I see you'll talk about this at the Analyst Day, but every single header that you had in terms of strategies is investing as opposed to operating margin opportunity. And investors clearly have a high -- very high number in terms of what the actual margin opportunity could look like. So any color on that would be helpful.
Michael Witynski:
Yes. I'll throw it to Kevin for a little bit of color. But the way I think about it, yes, we are investing. But also, we're delivering earnings EPS growth throughout the time and top line growth. So as Rick and I said, the things that we are investing, they will have a return for long-term sustainable growth. And if you look at our EPS from the midpoint range up, it's a 40% -- just under a 40% increase in EPS, and we moved our top line up. So yes, we'll be investing in the future, but we're going to be investing with the thought of continuing to drive that top line and the bottom line at the same time.
Kevin Wampler:
The other thing I would say, Karen, as Mike mentioned in his early comments, we do have a new Finance Committee. This committee obviously will be very focused on return on invested capital as we think about things. There are some things we have to do because we need to do it, which is -- you can look at our store standards. We want to make sure we have stores that are -- keep the standards that we expect and our customers deserve. So those are investments you make. But if you look, a lot of this is capital investment in systems and in our supply chain that, again, it's about productivity and efficiency and making it easier at the store level for that store manager and the assistant manager and that team there that's working very hard every day. So our job at the end is to make their job easier. And that's where these investments will -- may have a big payoff at the end of the day.
Michael Witynski:
Yes. And I would just close with our balance sheet and cash flow enables us to do this. We can invest to keep growing our store count to be a growth company. We can invest in the key enablers and supply chain and IT. And we can buy back shares to grow our share. So we've got options going forward. It's not just simply investing in expenses.
Operator:
Next, we'll go to Michael Lasser with UBS.
Michael Lasser:
So some of the skeptics are arguing that Dollar Tree is going to get a bunch of growth this year from raising its prices by 25% on the bulk of its assortment and seeing some timing benefits from selling through some older cost inventory, and now it's talking about investments. So do you think in light of all that, that the core banner or the enterprise, I should say, can grow both sales and margins next year while you're making these investments?
Michael Witynski:
Yes, we do.
Michael Lasser:
And my follow-up question is -- yes, that's helpful, Mike. My follow-up question is, as you focus your price investments, how do you ensure that you're not going to spark a race to the bottom in light of the very competitive environment that you operate in with some really large competitors?
Michael Witynski:
Yes. And that's important. We've got to be meaningful to our customers first and foremost, and that's what we're going to focus on. And on the other side, we've got Larry here who works very closely with the vendor manufacturers, and we will balance it, right? We'll make good decisions to invest where we need to, to meet the customers' needs in the marketplace. We're just going to simply close the gap to where we are on our KVIs, our key value items, and then just make sure the entire shopping experience is at a great value for our customer. And it's a balance.
Operator:
Next, we'll go to Chuck Grom with Gordon Haskett.
Charles Grom:
Rick, it's really great to hear your voice after all these years. My question is on the traffic decline at Dollar Tree. You talked -- I think you said it was down about 4%. I was just curious how that trended during the quarter, particularly in light of you're introducing more of the new products into the mix. And a follow-up to that would be I think you said 960 SKUs with the plan for 2,000. I think the average Tree store has about 8. So I'm just curious like how many SKUs you want to change? And how do we think about that rollout over the balance of the year?
Michael Witynski:
Well, the 2,000 were the amount that we needed to change. Remember, at last earnings call, our merchants since last September went item by item and put our item on the table and went out and shopped the entire competitive market to make sure that it's -- at $1.25, it is still a great value. And our customers are telling us that in the results. So the 2,000 items are the ones that we thought we needed to invest more in and turn over and/or bring new that we had to discontinue over the last 18 months or just weren't a value anymore. So the 2,000 is what our goal was, and we're halfway through, 47%. The other half are going to flow through. And as they flow through, we're getting great results.
But also remember, not -- and Kevin talked about it, it's a dynamic situation in market right now. So what we thought 6 months ago has changed already just because of the cost pressures we're seeing. So our Dollar Tree merchants know that at a fixed price point, they don't have to carry every item, and they drop the item and go get a replacement item and at the margin that we need. And our mix of items always changes out. That's the exciting thing about Dollar Tree. It's an extreme value and ever-exchanging meaningful assortment. And it's -- and the customers respond, and it's the thrill of the hunt. That's part of our mission at Dollar Tree. They're used to it. They've always done it at $1. Now they're just doing it at $1.25, and it's working very well.
Kevin Wampler:
And Chuck, on your question about traffic. This quarter, in particular, is very affected by Easter. Easter was 2 weeks later. So you would have seen the best traffic in the third period and probably the biggest decrease in traffic more than likely in the second period because of the later Easter as well as when the stimulus dollars were released. So I think those are probably kind of the 2 factors. It's pretty lumpy because of those 2, but that's kind of the factors that are in play in Q1.
Michael Witynski:
One of the things that we're really seeing excitement around are our seasons are accelerating more than they used to at $1.25 and the meaningful assortment and then with our rollout of our $3 and $5 items that we're rolling out to another 1,500 stores this year. So the combination of the $1.25, $3 and $5 in our seasonal business has really given us a lift that we're excited about. And in quarter 2, if you think there's -- in quarter 1, Kevin talked about the great Easter and Valentine's, and we saw great response from the customers. Quarter 2 is summer, and you got Memorial Day and the Fourth of July. But the back half of the year is when back-to-school, Halloween and then Thanksgiving and Christmas that we're really setting ourselves up to have a great back half.
Charles Grom:
That's great. And just my follow-up would be historically speaking, you look back at other periods of consumer duress, and maybe Rick can opine on this question to a degree. I'm curious how long of a lag it was before you saw that middle-income customer begin to trade down and if you think this current macro environment is going to be different than what we saw over a decade ago.
Michael Witynski:
Yes. They're just -- it's a different pressure this year. But you're right, in 2008, '09 and '10, both Family Dollar and Dollar Tree saw an acceleration in their comp store sales. And there was just a slight drag, but they saw it a little bit in 2008 when it was happening and then '09, '10 and '11, it was sustained. It's hard to predict what's going to happen now just because it's -- there being pressure for different reasons.
Operator:
[Operator Instructions] We'll next go to Edward Kelly with Wells Fargo.
Edward Kelly:
Rick, great to hear your voice. First thing I wanted to ask is just about the $1.25 and the elasticity improving where you're adding value. Just more -- a little bit more detail on the number of categories you've done in terms of adding value back and what's left to do. And then how much bigger is the opportunity within discretionary in terms of like adding value or bringing items back? I mean it does seem like that would be the area where there's potentially a more powerful impact.
Michael Witynski:
Well, actually -- well, thanks for the question. Our discretionary, the value in our discretionary, our customer recognizes, and there wasn't a lot of rework that needed to happen there. And that's evident. That's why our discretionary business comped at 14%, and we really haven't touched it that much.
Where we're focusing the 2,000 items are really concentrated mostly in consumable categories. So in the salty snack, in the carbonated beverage and in the food, that's where these categories we have 47% of the SKUs in. But really, we're going to add more in food. We're going to add more in carbonated beverage and more in salty snack to really drive that consumable. And it will take time. I -- we believe that's a traffic driver. And as the customers experience the items and appreciate the value we're giving them, over time, we believe that, that will help drive traffic into the overall store, not just those categories.
Edward Kelly:
Okay. And then just a quick follow-up on $3 and $5, can you go faster? Why not go faster? The response seems to be good. Just updated thoughts there.
Michael Witynski:
Yes. It's a great question. We would go as fast as we can. We are going as fast as we can. If you remember last year -- it's really supply chain right now that's tempering our speed. Last year, we wanted to open up 500. And if you remember, the customers responding so well that we were selling through and the supply chain was slowing things down. So we slowed down our acceleration of rolling it out throughout the year, but we still ended up at 600 stores. So we're going to do -- we accelerate it to 1,500, and it's really depending on the supply chain because we're buying these products 9 to 12 months out.
And it's -- we're excited about rolling this out. We're -- our expectations are to get this done as soon in the year as possible, and we're going to continue to roll that out. But we have every expectation to roll this $3 and $5 out throughout the entire network. And that's probably something that we can share at our October Analyst Day is what that -- what's that looking like. Because we really like it. We're putting this product in our stores. We're really seeing a benefit on the seasonal side of it. So our $3 and $5 items, combined with our great value at $1.25, is just lifting that entire seasonal sales in those respective stores. So we're going to keep enhancing the product. We're learning a lot, and it's going to be absolutely dedicated on the discretionary side of the store.
Operator:
We'll go next to Kelly Bania with BMO Capital Markets.
Kelly Bania:
Just wanted to just ask first about freight costs. There was a comment about maybe annualizing the increases from last year, and I think that's consistent with last quarter. So just curious if you can help us understand just how you view the state of the global shipping backdrop from your seat, what you're expecting from contract versus spot this year and just the overall cost for that.
Kevin Wampler:
Yes. Kelly, this is Kevin. I'll start with some information on that. And really, in Q1, our freight was up, but it was very consistent with how we had forecasted it. And again, as we had talked about in March, we expected the first half of the year in particular to be affected by the annualization of the rates we saw in the last half of '21. So that feels like a good place to start.
Obviously, diesel fuel has increased, and we've increased our forecast for the current market rates. And here is something to maybe give all of you kind of a metric to kind of think about diesel freight. So just a $1 change in rate for the year would be about a $63 million headwind. So that's the annualized number. And so you guys can do the math on what that means on a prorated basis. But that kind of gives you a feel for that. But we have the current market rates as we see it in our forecast and embedded in our guidance. In regards to ocean freight, the backlog is definitely significantly less than a year ago. It's not completely gone, but it's definitely better than it was. It's early. The contract carrier performance has been pretty much on plan at this point. We are still using chartered vessels, which has been successful and been helpful and continuing to move good. And the NVO rates have pretty much been in line with the way we have budgeted them at this point in time. So from our point of view, the way we came into the year looking at it, we're comfortable with where we're at. Obviously, it's -- the market can change rapidly, but we feel good about where we're at, at the moment.
Michael Witynski:
Yes. I would just add that from -- add on to what Kevin said, we've been battling this ocean freight for 2.5 years, and we felt it probably before anybody else did just because of our fixed price and the amount of containers we import. So this year, we've contracted slightly more than our needs. And it's because we're anticipating a continuation of some blank voyages that will continue to disrupt the supply chain. And as Kevin said, to fill our needs, we're using a combination of contracts, the NVO and our own dedicated charters. So -- and we've smoothed out our -- the purchasing of what we need. We've smoothed that out to be more consistent and dependable for the carrier. So we've gone into this year with 2.5 years of disruption experience. And as Kevin said, we're -- we think we have a good handle on the cost of it without unknowing any disruption that could happen going forward.
Kelly Bania:
That's very, very helpful. And then maybe I'll just ask one more about Dollar Tree. As you merchandise against this new $1.25 price point, are you targeting that 36% gross margin today? Or do you maybe leave a little cushion for some higher costs in the future? And as well, do you consider testing even more price points, $1.50 or $2, just given how this is already going?
Michael Witynski:
Well, we have $1.25 fixed price point that we moved after 35 years, and then we've got the $3 and $5 price points that are fixed price points that we are rolling out as fast as we can over the next couple of years. So we feel really good that we can deliver an unbelievable assortment that is exciting and meaningful and an extreme value for our customers and still delivers on that thrill of the hunt. So we're excited about that. And we -- as you think about our comments about continuing to drive top line and bottom line performance, we will always keep in mind the margins needed to deliver those 2 things.
Operator:
All right. And that's all the time we have for questions at this time. So I'd like to turn it back over to Mr. Randy Guiler for any additional or closing remarks.
Randy Guiler:
Thank you, Alan, and thank you all for joining us for today's call. Our next earnings conference call to discuss Q2 results is tentatively scheduled for Thursday, August 25, 2022. Thank you, and have a good day.
Operator:
That does conclude today's conference. We thank everyone again for their participation.
Operator:
Good day and welcome to the Dollar Tree, Inc. fourth quarter earnings conference call. Today's conference is being recorded.
At this time, I'd like to turn the conference over to Randy Guiler, VP of Investor Relations. Please go ahead.
Randy Guiler:
Thank you, Jordan. Good morning and welcome to our call to discuss Dollar Tree's fourth fiscal quarter and fiscal year 2020. With me on today's call will be our President and CEO, Mike Witynski; and our CFO, Kevin Wampler.
Before we begin, I would like to remind everyone that various remarks that we will make about expectations, plans and prospects for the company constitute forward-looking statements for the purposes of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Results might differ materially from those indicated by these forward-looking statements as a result of various factors included in our most recent press release, most recent 8-K, 10-Q and annual report, which are on file with the SEC. We have no obligation to update forward-looking statements, and you should not expect us to do so. Following our prepared remarks, we will open the call to your questions. [Operator Instructions] I will now turn the call over to Mike Witynski, Dollar Tree's President and Chief Executive Officer.
Michael Witynski:
Thank you, Randy. Good morning, everyone. Thank you for joining me today. What a year. I believe that from now -- that years from now, many of us will reflect upon 2020 as being one of the most unique, unpredictable and challenging business environments of our career. My sincerest gratitude goes out to our 195,000 plus associates working in more than 15,600 Dollar Tree and Family Dollar stores and in 26 distribution centers and to our field leadership teams as well as our store support team here in Chesapeake, Virginia. Your commitment and dedication to protect and serve our customers is critical to our company's success. As an essential retailer in the value segment, we will continue to be part of the solution for millions of households across North America.
Additionally, I would like to recognize our business partners, both supply chain and suppliers, for their efforts to support our business throughout the year. In 2020, we exceeded $25 billion in annual sales for the first time, and we have a long runway of growth ahead of us. As our business grows, so does the need and support from each of our business partners. We appreciate your continued support. The recent trends have been encouraging. COVID cases are on the decline, and vaccinations are on the rise. However, we will continue to be relentless in our efforts to protect each other until this pandemic is behind us. I am very pleased with the team's operating performance for the fourth quarter, highlighted by solid same-store sales increase, improved gross margin and expense leverage. The team delivered EPS increase of 310% compared to the prior year's quarters or 19% when adjusted for discrete charges in the prior year. Our results included a 4.9% enterprise comp increase, an 80 basis point improvement in gross profit margin and a 90 base increase in operating profit margin when compared to the prior year's adjusted numbers. Our Dollar Tree segment delivered another quarter of positive same-store sales with a 2.4% increase. January was the strongest month of the quarter, followed by November. In fact, January was our strongest monthly comp since April of 2019. December was slightly negative as store traffic was impacted by an escalation in COVID cases, resulting in expanded lockdowns and significantly fewer holiday social gatherings among families, companies, churches and schools. As we have seen in the onset of the pandemic, sales were again driven by average ticket, which increased 17.9% as shoppers continue to consolidate trips. Comp transaction count declined 13.1%. We delivered a 36.1% gross margin, and Dollar Tree's operating margin, which included $13.8 million in COVID-related costs, came in at 16% operating income. Categories performing well included crafts, seasonal, household products, floral, kitchenware and beauty and eyewear. Building on the continued success of craft assortment, we completed the rollout of Crafter's Square to all U.S. Dollar Tree stores in January. Inspiring the creativity of our customers is at the core of Dollar Tree, and we are thrilled to provide an even broader assortment of art and crafts supplies at tremendous values. With our $1 fixed price point and more than 7,500 U.S. store locations, Crafter's Square presents customers with an unlimited solutions for current learn-from-home and work-from-home environment. Additionally, terrific opportunity exist for DIY home projects and decor, crafts for the entire family, seasonal decorations and handmade gifts. Our shoppers love the expanded assortment, which is validated by the excitement Crafter's Square is generating across social media platforms, including YouTube and Instagram. Regarding our Dollar Tree Plus!, our shoppers love the values, and we exceeded our initial sales plan for the fourth quarter. We had great sell-through on our seasonal products, on our toys and household consumables. We are on schedule to kick off the previously announced expansion of Dollar Tree Plus! this month. We are expanding multi-price assortment from the current base of 120 stores to a total of 500 stores and will be completed by August. Additionally, we are capturing great buying synergies as the majority of the $3 and $5 merchandise for the DT Plus! will be offered in both banners. Family Dollar sales highlights for the quarter included an 8.1% comp increase, comprised of a 21.9% expansion in average ticket, partially offset by 11.3% decline in transaction count. This is similar to the ticket traffic trip consolidation dynamic we have seen since Q1 of 2020. Regarding the cadence of comps, all 3 months were positive, with January being the strongest month. As a reminder, all Family Dollar stores were closed on Christmas Day in 2020, which has impacted December comp results as approximately 5,600 stores were open for business the previous year. January was Family Dollar's strongest monthly comp since May of last year. We saw solid sales across many of the discretionary categories that we have been focused on improving, including home decor, apparel, household cleaning, lawn and garden, party, beauty care and seasonal. The consumables side of the business delivered another positive quarterly comp at 6.2%, and the discretionary comp was a strong 13.5% comp. In Q4, discretionary as a percent of net sales at Family Dollar increased 120 basis points to 26.2% of sales. Similar to recent quarters, based on third-party data, our market share in discretionary grew 2x faster than the remaining market in Q4. Late in 2020, we launched our initial test for produce and frozen needs at select Family Dollar stores, targeting markets where shoppers have fewer local grocery options. We want to provide shoppers with convenient access to basic produce items as well as beef, poultry and pork. We plan to expand our test in 2021. We recently announced the expansion of our new partnership with Instacart platform across the U.S. Same-day delivery is another example of meeting the evolving needs of Family Dollar shoppers. The initial results have exceeded our expectations, and we continue to receive very positive feedback from shoppers. These transactions have materially higher average ticket, and we believe the Instacart platform is enabling us to broaden our dollar -- our Family Dollar customer base. Interestingly, in the first 3 weeks of the national rollout, more than 80% of Family Dollar stores had 1 or more Instacart transactions.
As always, our most important scorecards come from our shoppers. We are seeing considerable improvements in our customer satisfaction survey scores. For Q4, we saw record numbers across each of the 4 key categories:
store cleanliness, product assortment, customer service and speed of checkout. In fact, each of these categories have shown improvement for 3 consecutive quarters. Contributors to these -- this success is an enhanced Family Dollar brand strategy program that clearly conveys expectations and examples to our store teams. And the chains' annual store manager turnover are at the best in over a decade. The improved customer satisfaction results gives us confidence that we will be able to retain shoppers that discovered or reengage with Family Dollar during the pandemic.
Regarding Dollar Tree Canada, the team delivered another solid quarter, exceeding its plan for sales, gross margin and operating income. From a real estate perspective, we completed more than 280 projects, including 124 new stores, 11 relocations, 106 Family Dollar renovations and 45 store closings. We ended the year with 15,685 stores. We accomplished a great deal in 2020. Much of this was made possible by our 2019 initiatives that really set the stage to gain traction and momentum in 2020 and beyond. To quickly recap, in 2019, we consolidated our Dollar Tree and Family Dollar store support centers into 1 campus, greatly improving efficiencies through enhanced communication, collaboration and support. We made tremendous progress on Family Dollar store optimization initiatives by rebannering 200 stores, closing more than 400 stores and doubling the pace of our renovation program to more than 1,000 per year. We also launched our initial test for Dollar Tree Plus!, and we realigned our leadership team to enhance and align the consistency of communication, strategies, process and workflows. For example, Dollar Tree and Family Dollar merchants went through 2020 in complete unison for buying calendars, buying trip meetings, planning dates and category performance reviews. This strength in alignment was very evident in the success of our recent virtual buying trip in January, which is our biggest buying trip of the year. These initiatives help build the foundation for 2020 performance. The progress we have made at Family Dollar in the past despite the pandemic has been remarkable. We are benefiting from improved store conditions and better execution on initiatives, resulting in market share gains. We have also seen improved customer satisfaction scores, store turnover and shrink improvements. I am convinced that Family Dollar will exit the pandemic as a much stronger organization. This progress is why I'm more enthusiastic about the opportunities in 2021 and beyond, including the expansion of Dollar Tree Plus! and the growth of our new Combination Stores into small towns across America. I will go into more detail on our plans for 2021 after Kevin speaks to the Q4 performance and our outlook. Kevin?
Kevin Wampler:
Thank you, Mike, and good morning. For the fourth quarter, consolidated net sales increased 7.2% to $6.77 billion, comprised of $3.71 billion of Dollar Tree and $3.06 billion of Family Dollar. Enterprise same-store sales increased 4.9% or 5% when adjusted for Canadian currency fluctuations. Comps for Family Dollar increased 8.1% and Dollar Tree segment increased 2.4%.
Overall, gross profit for the enterprise increased 9.8% to $2.15 billion, and gross margin improved 80 basis points to 31.8%. The gross profit margin for the Dollar Tree segment decreased 10 basis points to 36.1% when compared to the prior year's quarter. The factors impacting the segment's gross margin performance include distribution costs increased 40 basis points primarily due to higher payroll costs and depreciation. This includes the continued ramp-up of the 2 new distribution centers as well as $4.4 million or 10 basis points of COVID-related expenses primarily premium pay and bonuses. These higher DC costs as a percentage of net sales were partially offset by a 20 basis point improvement in markdowns and a 5 basis point improvement in shrink. Merchandise costs, including freight, also improved 5 basis points. Improvements in merchandise mix and markdown were mostly offset by increased freight costs.
Gross profit margin for the Family Dollar segment improved 200 basis points to 26.6% in the fourth quarter. The year-over-year improvement was due to the following:
markdown expense improved 100 basis points due to lower promotional activity and improved sell-through of seasonal merchandise and apparel; occupancy costs decreased approximately 50 basis points from leverage on the 8.1% comp sales increase; shrink improved 35 basis points on improved inventory results; distribution costs improved approximately 15 basis points compared to the prior year quarter; the current year quarter included approximately $3.2 million or 10 basis points of COVID-related expenses, primarily premium paying bonuses; and regarding merchandise costs, including freight, improvements in merchandise mix and markdown were essentially offset by increased freight costs during the quarter.
Consolidated selling, general and administrative expenses improved 540 basis points to 21.7% of net sales compared to 27.1% in Q4 a year ago. The prior year's quarter included a $313 million noncash pretax and after-tax goodwill impairment charge, an $18 million charge to the litigation reserve. Excluding these items from the prior year's quarter, SG&A expenses improved 20 basis points from an adjusted 21.9% of net sales.
For the fourth quarter, the SG&A rate for the Dollar Tree segment as a percentage of net sales improved slightly to 20.1% of net sales when compared to the prior year's quarter. Payroll costs improved approximately 30 basis points and is comprised of the following:
payroll expenses increased approximately $7.2 million or 20 basis points for costs associated with COVID-19-related payroll and bonuses. Additionally, increased incentive compensation was partially offset by lower health insurance benefits.
Other selling, general and administrative expenses decreased approximately 20 basis points primarily from reduced travel and lower legal and professional fees. The depreciation cost decreased 10 basis points. Excluding goodwill impairment and litigation reserve charges from the prior year's quarter, the SG&A rate for the Family Dollar segment improved approximately 80 basis points to 20.6% compared to an adjusted 21.4% for the fourth quarter of 2019. Depreciation improved 30 basis points, primarily from leverage on strong comp sales increase. Other selling, general and administrative expenses decreased by approximately 30 basis points primarily due to lower advertising and travel costs as a percentage of net sales. Payroll-related expenses improved approximately 15 basis points, and store facility costs improved approximately 5 basis points, primarily from leverage on comp sales and lower electricity costs. Corporate and support expenses increased 20 basis points primarily related to higher incentive comp and stock compensation expense compared to the prior year's quarter. Operating income improved 173% to $681.6 million compared with $249.4 million in the same period last year, and operating income margin was 10.1% in the fourth quarter compared to 3.9% in the prior year's quarter. Excluding the $313 million goodwill impairment and $18 million litigation reserve from the prior year's quarter, operating income margin improved 90 basis points from the adjusted 9.2%. Q4 of 2020 included total incremental operating costs of $24.8 million for COVID-19-related expenses. These incremental costs by segment were $13.8 million for Dollar Tree, $10.6 million for Family Dollar and $0.4 million for Corporate, Support and Other. Nonoperating expenses totaled $34.2 million, comprised of net interest expense. Our effective tax rate was 22.3% compared to 41.3% in the prior year's fourth quarter. The prior year rate was affected by the noncash goodwill impairment charge that was not tax deductible. Without the goodwill impairment charge, the tax rate was -- for Q4 2019 would have been 16.6%, which included a reduction in tax expense of $24.6 million for the reversal of our valuation allowance related to the company's foreign net operating loss carryforwards. Company net income of $502.8 million or $2.13 per diluted share, which included $0.08 per diluted share for COVID-19-related expenses. This compares to a net earnings of $123 million or $0.52 per share in the prior year's quarter and an adjusted earnings per share of $1.79. Combined cash and cash equivalents at year-end totaled $1.42 billion compared to $539.2 million at the end of fiscal 2019. The company paid off the $300 million legacy Family Dollar note during the quarter. Outstanding debt as of January 30, 2021, was $3.25 billion. During the quarter, we repurchased approximately 1.83 million shares for $200 million. With the Board action announced this morning, we now have $2.4 billion authorized for share repurchases. We will continue to invest in our business and will provide postquarter updates on share repurchase activity. Inventory for Dollar Tree at year-end declined 5.9% from the same time last year, while selling square footage increased 3.7%. Inventory per selling square foot decreased 9.2%. Inventory for Family Dollar at year-end increased 0.5% from the same period last year, while selling square footage increased 1.8%. Inventory per selling square foot decreased 11.3%. Our inventory levels improved in Q4 and will continue to be more productive with lower inventory, significantly increasing our inventory turns. Capital expenditures were $191.8 million in the fourth quarter versus $252.5 million in Q4 last year. For fiscal 2021, we are planning for consolidated capital expenditures to be approximately $1.2 billion. Capital expenditures will be focused on 600 new stores and 1,250 Family Dollar H2 renovations. The new stores will be 400 Dollar Tree stores and 200 Family Dollar stores, including both H2 and combo stores, formats, based on market locations. The addition of frozen and refrigerated capability to select Dollar Tree and Family Dollar stores, IT system enhancements and projects, development of our Chesapeake campus, installation of LED lighting and HVAC and flooring replacements in select stores and the ongoing construction for the second phase of our new distribution center in Ocala, Florida. Depreciation and amortization totaled $182.9 million for Q4 compared to $179.1 million in the fourth quarter last year. And for the year, depreciation expense totaled $686.6 million. For fiscal 2021, we expect consolidated depreciation and amortization to range from $720 million to $730 million. Due to a number of variables and uncertainties, we're not providing specific sales and EPS guidance. These variables include unknowns related to the COVID pandemic and its impact to customer shopping patterns, timing and magnitude of government stimulus and potential for the timing of changes with federal minimum wage. I do want to share some points to assist your modeling for 2021. The February storms have brought snow and freezing temperatures through Texas and much of the central part of the states, resulting in more than 5,500 lost store days for closures of Dollar Tree and Family Dollar stores in the areas most impacted. Stores are now back open and operating, but Q1 sales will be impacted from these closures. We will be cycling the 2020 onset of the COVID pandemic in 20 -- in Q1. Our business segments were impacted in different ways a year ago. At Dollar Tree, both sales and gross margin were negatively impacted by losing discretionary Easter-related seasonal sales. As a result, in Q1 of 2020, the Dollar Tree segment had a 0.9% comp decrease and a 31.9% gross margin. At Family Dollar, for Q1, we'll be cycling a 15.5% comp increase in the prior year, which will be our toughest quarterly compare for 2021. We face headwinds for minimum wage and freight costs in 2021. The minimum wage has increased in certain states and localities and may increase nationally depending on the outcome of future legislation. The currently scheduled minimum wage increases are estimated to increase store payroll by $45 million to $50 million in 2021. We're experiencing some delays in receiving import merchandise as a result of worldwide equipment shortages and issues with port congestion. As a result of current market conditions, we're seeing significant increases in cost of import freight and moderate pressure on domestic freight. We currently project $80 million to $100 million of additional costs in fiscal 2021 as a result of these market conditions. These costs primarily affect the first 3 quarters of the year as currently projected. We believe these headwinds will be more than offset by productivity and cost savings initiatives, such as Crafter's Square, H2 and combo stores, continued focus in shrink and reduced COVID-related costs. We incurred COVID-related costs of $279 million in 2020 to support our associates, stores and customers. We will continue to incur costs for COVID activities in 2021 but, we believe, at a materially reduced level. We've got tailwinds as well. COVID relief checks are anticipated to provide a significant lift. We also expect that the COVID -- the base customer traffic could return to more normalized levels. Net interest expense is expected to be approximately $34 million in Q1, approximately $135 million for fiscal 2021. Our outlook assumes a tax rate of 23.5% for the first quarter and 23.2% for fiscal 2021. Weighted average diluted share counts are assumed to be 234.5 million shares for Q1 and 234.8 million shares for the full year. Our outlook does not include any share repurchases. But as noted, we increased our share repurchase authorization to $2.4 billion. Over the past several years, the company has reduced its debt from the acquisition by over $5 billion, returning to a solid investment-grade rating. With our strong flexible balance sheet, we'll be able to increase store growth and return to share repurchases as an important part of capital allocation going forward. We'd expect to complete the $2.4 billion share repurchase authorization over the next 2 years or so. And I'll now turn the call back over to Mike.
Michael Witynski:
Thanks, Kevin. Again, I'm extremely proud of the team's efforts for fiscal 2020. For the year, our customer satisfaction scores are improving, and we are experiencing our lowest store manager turnover rates in many years.
The team delivered an enterprise comp increase of 6.1%. Gross profit increased by more than $740 million, a 70 basis point improvement. We delivered our SG&A costs, which were flat year-over-year, as a percent of net sales despite incurring $279 million or 110 basis points in COVID-related costs. Enterprise operating profit margin improved 70 basis points to 7.4%. The company repurchased 400 million shares and ended the year with more than $1.4 billion in cash on the balance sheet. And we delivered annual diluted EPS of $5.65. This morning, we announced our newest and tested concept that is working remarkably well in rural markets. What we refer to is our combination or combo store format. As I have said in the past, we will continue to refine strategic store formats designed to serve more customers in all types of geographic markets while improving store productivity, margins and returns. The Combination Store leverages both Dollar Tree and Family Dollar brands to serve small towns across the country. The store combines Family Dollar's great value and assortment with Dollar Tree's thrill of the hunt and $1 price point, creating a new format targeted for populations ranging from 3,000 to 4,000 people. These are markets where we traditionally do not open a Dollar Tree store alone. We opened the first test Combination Store in late 2019, followed by 2 additional test stores in early 2020. Closely analyzing the store performance and customer feedback and utilizing learnings, we refined the concept. Between July 2020 and calendar year-end, we opened or renovated 32 additional stores. And currently, we have nearly 50 new stores in small towns like Linden, Alabama, Hogansville, Georgia, Bovina, New York and dozens of others. Compared to other small market Family Dollar stores, these Combination Stores are delivering same-store sales lift of greater than 20% on average. Combination Stores are more productive, delivering higher gross margins and are better leveraging store costs. Our successful H2 stores and Combination Stores will both be part of the Family Dollar and new store and renovation strategy moving forward. We are extremely pleased with our customers' response to the new Combination Store concept. Our goal is to have formats that leverage the best of Dollar Tree and Family Dollar brands to serve customers in all types of geographic markets. We believe we can continue to change, evolve and improve. To really share why we are very excited to introduce this new format, we are providing a 3-minute video, along with photos, introducing the new Combination Stores at FamilyDollar.com/ComboStores. Please go check it out. Our teams worked incredibly hard throughout fiscal 2020. I could not be more proud of our team's commitment, dedication and focus. We believe our proven strategic store formats and accelerated store growth plan, 1,250 planned store renovations for the year, several key sales and traffic-driven initiatives, along with a robust balance sheet, will enable us to deliver long-term value for each of our stakeholders, our customers, associates, suppliers and shareholders. Operator, we are now ready to take questions.
Operator:
[Operator Instructions] It looks like we have our first question on the line from Kelly Bania from BMO Capital.
Kelly Bania:
Wanted to ask just first about payroll and the freight costs that you called out. And just if you could help us understand at a greater level of detail how you're getting to that $45 million to $50 million impact from payroll and $80 million to $100 million on freight. And I think the comment was that these pressures are expected to be more than offset by other factors. So just want to make sure I'm understanding -- are you suggesting that you are expecting EBIT growth in 2021? Or maybe you can just elaborate on that.
Kevin Wampler:
Sure, Kelly. It's Kevin. Yes. So we wanted to give some color, obviously, as to what's going on. Obviously, not giving specific guidance given the many variables that are out there right now. The $45 million to $50 million that we spoke to in regards to payroll is very specific. Our operations, labor department looks at that by state. We know there's approximately 30 states affected this year. We know our labor pool in those states. We know how many hourly people we have, and we go through a calculation on that.
Now that's no different than any other year. This is just really the first time we've given you a number as to what it relates to. We have done -- we have faced these same type of increases over the last couple of years. But this time, we were just trying to put some graphics around it to help people understand the size of that. As it relates the freight costs, again, our current projection is roughly $80 million to $100 million, really fairly comparable across both banners. It is much more import related than domestic related so it's been probably 75-25, 80-20 as far as import related at this point in time. And that is just based upon current market conditions that we currently face. As many of you know, we go to market with our freight contract or import freight contracts in the spring here. These are negotiated in March and April and -- to go live then in May. So really, a lot has been talked about in the marketplace in general. So I don't think there should be a lot of surprise around it. And again, we're just trying to give an idea of the size of that. And then obviously, if we look at the offsets, so obviously, COVID costs in and of themselves last year as we talked about were $279 million. If we -- even if we said we spent at the same rate we did in Q4, which is roughly $25 million, we'll spend, obviously, significantly less going into the new year. So I'll let you guys do the math on that at the end of the day, but those are the puts and takes. And obviously, it goes beyond that. Obviously, driving sales -- I think we obviously talked this morning about how we'll continue to drive sales. But also there's other items. When you look at shrink as a potential good item after maybe a second year in a row after having an upswing a couple of years prior to that. So some good progress being made there. We're still not where we think we can get to, but really proud of the teams, the operations teams and the asset protection teams that have been working hard to mitigate the issue that we've faced there.
Kelly Bania:
That's very helpful. And then just wanted to ask, on the Combination Stores, any color you can give us on the new store economic model, the cost of the stores, the size and sales per square foot and how the returns maybe compare to the H2s.
Kevin Wampler:
Yes. So right now, the stores are about 10,500 square feet. So they're slightly bigger than what a normal Dollar Tree would be. And the -- we like the economics. Our sales are exceeding utilized share -- the comp sales are 20% or greater on average. And when we're going into a new market, they're performing better than our expectation of when it was just a Family Dollar as a stand-alone store.
And you can imagine the margins are enhanced because now you've got the mix of Dollar Tree product in there at $1 price point and in the categories that normally are higher margins. And you're leveraging it with 1 store manager and 1 store team and delivering 2 brands to a customer and to a small town. And we like the results.
Operator:
[Operator Instructions] We'll take our next question from Joe Feldman with Telsey Advisory Group.
Joseph Feldman:
Great. I wanted to ask on freight again. Kevin, as you mentioned, you guys do renegotiate freight every spring. And I guess, I'm a little confused why you'd be seeing so much pressure, at least in the fourth quarter. I guess are they allowed to put surcharges on your negotiated rates? Or -- and I understand, I guess, you're assuming it will be just higher pressure for this year. But maybe you could share a little more color on that.
Kevin Wampler:
Sure, Joe. As you look at it, we contract for a certain volume of containers. It's been a big year from an import standpoint, obviously. And so at some point, if you exceed your volume, you do pay more potentially based upon on the marketplace. The spot market, and you guys see all the same information we see, has been up significantly in general. And again, then a part of it is supply and demand. There is a backup in China, in Asia. And to get goods move in some instances, people are paying more. And it's not just us. You've heard other retailers over the last 2 weeks speak to it as well. So it's not a Dollar Tree-specific issue. It's an industry issue.
And our team is working through that and moving our goods. We've been able to keep our seasonal goods coming in, and feel good about that. But in general, based on where the marketplace is projected to be, that is our best projection as we sit here today.
Joseph Feldman:
Got it. And then a follow-up question. As you think about '21, and I know you're not giving too much detail on guidance. But I guess, how should we think about the profitability of the 2 different brands? Family Dollar has been much better. We've seen a lot of improvement there. Should we expect continued greater improvement within the Family Dollar profitability versus kind of stable at the Dollar Tree business?
Kevin Wampler:
Well, Joe, I think as we think about it, I mean, we obviously always think there's opportunity in both. Even if we've made a big leap this year with the Family Dollar operating income going in the right direction, it's still not where we want it to be ultimately. We've made big strides. And we do believe, obviously, as we began 2020, we spoke a lot about discretionary business and building that side of the house and us being a more important player in building that kind of muscle. And obviously, the pandemic helped with that, but we do believe that we've made strides. And again, I think Mike, in his comments, talked about the fact that are just -- we're growing twice the market in that piece of business. So that's a great opportunity to continue to go.
But that doesn't mean we don't think there's other opportunities as well. You look at the -- as we talk about the combo store, we think that's a great opportunity. We believe there's, at a minimum, 3,000 locations out there where we can play an important role in our customers' lives on a day-to-day basis and be their place to shop for many, many things. They may not live close to a large metropolitan area. And so it's a big opportunity as we think about it. So a lot of opportunity there. I think on the Dollar Tree side, I think, again, we always believe there's opportunity. And Dollar Tree has evolved over the years, as you well know, in the sense of we always reinvent ourselves. Most recently, we've talked about Snack Zone. We've talked about our Crafter's Square initiative. And again, some of these initiatives are traffic driving. Some of these are really margin driving and -- but it's always relevant to the consumer, and the $1 fixed price point does not go out of style. People love the value it provides. And now we can add upon that, obviously, taking the Dollar Tree Plus! opportunity, expanding into 500 stores, continuing to learn and build upon that and really be able to take that and benefit both banners by taking that $3 and $5 product.
Michael Witynski:
Yes. Joe, this is Mike. I agree with Kevin. I am so excited about 2021. And I absolutely believe there's growth for both banners. And Kevin hit on them. I'll start with Family Dollar. We are absolutely going to come out stronger on the backside of the pandemic than on the front side for a lot of reasons. And I think about what Kevin was speaking to on March 4 of last year, our comp sales in consumables were strong low single-digit quarter after quarter. And where we needed to focus our energy was on our discretionary side. And it was a year ago in December that Rick McNeely was assigned to be the lead merchant for both banners and really leverage synergies where possible and bring disciplines and capabilities to the Family Dollar team.
So during this pandemic, we didn't just survive through it. We thrived through it and changed our disciplines and strategies. And we looked at -- in our merchandising, we looked at our basic assortment of what we're carrying by sharper price points. We got better values. And we're not going to go back to the old way. We're going to improve upon that. And the pandemic really accelerated our inventory from the past and really flushed that through last year. And then our new receipts coming in on all the disciplines that I just got done describing are really selling it at a great mix, stronger sell-throughs, less markdowns and better turns. The second thing is our stores. You heard us talk about our customer satisfaction scores across the board for 3 quarters are improving. We've invested a lot in getting better initiatives and execution in our stores, and our customers are responding. And we'll have that carrying forward compared to going into the pandemic. The fourth thing, as Kevin said, is we've got clear direction now on a format strategy. We've got H2 format that is continuing to produce 10% comps when we go in and renovate them, and we're going to renovate another 1,250 of them this year. And then this wonderful new store of a combo store in small towns that is producing a 20% comp, and so another thing that we didn't have prior to last year going into the pandemic. And then our balance sheet as Kevin spoke about. We generate a lot of cash flow. And we've got $1.4 billion on our balance sheet, and that enables us to be very flexible and grow this company like we haven't grown before because we don't have to pay $1 billion to $1.2 billion every year to pay down the debt. We can use it flexible to grow this company and grow shareholder value. And then the last thing I would say on Family Dollar's side is -- and we haven't even been in the digital and omnichannel business. And you heard us just now dipping our toes into Instagram and we're -- or Instacart. And the Instacart is just getting a huge response for our customers and it give us a broader -- able to serve a broader segment of this customer with Instacart. So there's another upside with our digital and omnichannel. And then you've heard us about Dollar Tree Plus!. We will always grow that business, and we'll find those categories. And now we have our Crafter's Square in all Dollar Tree -- we just got it done in January. We're going on a goal this entire year with Crafter's Square. And you've heard us talk about Dollar Tree Plus!. So we're going to drive that Dollar Tree Plus. And then Dollar Tree didn't perform that well because of those COVID related -- if you look at our fourth quarter, our November comps in Dollar Tree were spectacular, and our January was the best in 2 years. What happened was December lockdown, because of -- the COVID cases increased and spiked at the highest levels across the country. And you all saw that. And the states, because of that, increased the lockdowns. People did not go around. And what happens is there wasn't any celebrations. The Dollar Tree feeds those celebrations in the schools, in the churches, at-home/at-work parties, and all of our party categories flourish during the first 10 days before Christmas. And it just didn't happen because of COVID. Outside of that, we had a great quarter with 2.4% comp, which was better than the fourth quarter in 2019, and we had a COVID problem. So we delivered 36 plus margin and a 16% op income at Family Dollar, and I believe we can beat that next year. So yes, to answer your question, I believe we're going to have a successful year at both banners for those reasons.
Operator:
And we'll take our next question from Paul Trussell with Deutsche Bank.
Paul Trussell:
I guess I wanted to maybe just follow up your comments with maybe some bigger picture questions then looking beyond 2021. Just curious on -- obviously, 2020 was a pretty unique year, to say the least. So just curious, as you kind of move and turn the corner here, if you can give some comments on long-term margin potential as we think about the Dollar Tree and Family Dollar banner, given what's transpiring on the merchandise front and with all the new formats. What would be the timetable do you think to be able to navigate all the headwinds and perhaps return to some of the levels we've seen in prior years?
Kevin Wampler:
Yes. Paul, this is Kevin. I'll start, and I'll let Mike chime in if he has anything. But I guess, I think about it in a couple of ways. One, one of the words you guys have all heard me use before, and I think it's very true within our company, is continuous improvement. We go into every year expecting to improve in all aspects of our business, and whether that's driving sales, reducing costs, being a more efficient company. And so that's just the way our mindset is. And so while I don't know that I have a timetable to give you in a sense of certain milestones, as I sit here today, and again, part of that is, obviously, the uncertainty of what's going on out there in the world with the pandemic. And -- but we would expect continuous improvement. And I think Mike has shared a lot of that with all of you this morning and the idea.
So we entered the year. The expectation is we're going to improve our operating income for both banners when we think about it. Whether we can do it with some of the things going on in the world, that's yet to be seen. But there's a great opportunity. And I think that's the most important thing, is the way we always want to improve.
Michael Witynski:
Yes. Paul, I agree with Kevin that we will continuously improve and drive our path on Family Dollar's side. As you've heard me, we have not arrived yet, and there is upside because we just cycled through our first year, and we are -- continue to look at our assortment, our allocations and improve upon the products that we have and price points.
And I think on the Dollar Tree side, we have things ahead of us, just like the tariffs. Once we got it in front of us, we know how to manage around it. And I would say the short term, the freight thing, once we're aware of it, we're going to figure out how to mitigate it and grow the margins and grow Dollar Tree. Dollar Tree, for 14 years, has had a quarter-after-quarter of kind of positive comp store sales growth, except for first quarter last year, and here we are cycling that right now this year. So yes, I feel very strong that we can continue to grow both sides.
Paul Trussell:
And this year, you're opening up maybe 600 stores and remodeling like 1,250 Family Dollars or so. Is that, in your mind, kind of a good go-forward run rate? Or do you see a scenario where you guys may actually want to accelerate in the future given the different formats and opportunities that you have? And just any updates on long-term store count potential?
Michael Witynski:
Yes. I'll comment on it and then flip over to Kevin to add. But from my perspective, we will absolutely -- we're going to continue -- we have 1,250 renovations this year. Next year, we believe there's going to be another 1,250. But then the great thing about our balance sheet, our capital structure, it enables to feed the growth as -- and accelerate the growth. So as we wind down the renovations after -- we'll have about this year and next year, then we can shift to total store growth. And then we've got these formats ahead of us that we feel very confident in growing. So yes, I would see the -- an acceleration in new store growth as we wound up or ramp up our 1,250 renovations for the next 2 years, then we'll shift to new store growth.
Kevin Wampler:
Yes. Paul, I think to your point, total number of stores, I know the -- I think the most recent numbers we've given is Dollar Tree, about 10,000 stores and Family Dollar, roughly 15,000 stores. And again, I think we haven't updated those recently to the Street. It's something that we're looking at. I think part of what plays into that and will be something we can maybe update in the future is the idea that as stores continue to evolve, it changes the way we think about what that potential is, right. So as we talk today about the new combo store, we have to relook at the marketplaces. And as we've said, we think that's 3,000 stores at a minimum at this point in time. And so at some point in the future, we would update that.
But it's a great opportunity. To Mike's point, the balance sheet helps support us in all things growing. And we're in a great place where obviously there are some retail space being vacated. That second-hand space has always been a big opportunity for us. And so that's another opportunity that allows us to grow at a good clip going forward.
Operator:
Looks like we have a question on the line from John Heinbockel with Guggenheim Securities.
John Heinbockel:
Mike, why don't we start with sort of strategic impact for the combo, right? So one, do you think it allows you, given the margin mix, to get sharper if you need to on Family Dollar pricing, number one. And then secondly, can you take learnings from the combo and put them into nonrural stores that may not overlap with Dollar Tree? Or are you pretty sensitive to that?
Michael Witynski:
Like I said, we're continuing to learn and refine on all our formats and do whatever it makes sense to get the most productive and improve our margins and profitability of the banners that we have. What I'm really excited about is -- on this format is that these are small towns that we would not go into the town with a Dollar Tree because the economics just don't support that. And we would go in with a Family Dollar and what we said is, well, let's go in with the great part of Dollar Tree and bring in the seasonal and the party and the stationery and the Crafter's Square and all the things that small-town America needs to celebrate their lives. And then on the Family Dollar side, it helps them live their lives and feed their families. So this Combination Store is really hitting on all cylinders from us because of the great mix and the great margin that provides and the overall productivity of the store.
And to your earlier comment, we will continue to look at the categories that do well. And don't forget that in our H2s, we already have about 20 categories that have the $1 items that we brought into those categories from the Dollar Tree banner that really helped bring that value program into those stores and are helping drive the H2 format as well. So we will continue to look at that, John.
John Heinbockel:
And then maybe one follow-up to that, right, because I know you sourced that product. What's the thought now, right, on the supply chain? And does this push the idea of hybrid DCs versus the one you now have? Does that accelerate that process?
Michael Witynski:
Well, we will always -- we are absolutely in a parallel path. To your point, we've got a great DC network, and we are evolving that with trying to decide which -- what kind of format in our DC we're -- we have a lot of trucks going by all these towns. So we're going to leverage stem miles and leverage our distribution network to make sure we're driving the most efficiencies as we feed these formats across the country. But you're right, that would lend well to Dollar Tree and Family Dollar product riding on the same truck to drive those efficiencies.
Operator:
And we'll take another question from Matthew Boss with JPMorgan.
Matthew Boss:
Great. So Mike, at the Dollar Tree banner, fourth quarter, low single-digit comps overall, basically matched the concept's historical run rate, despite I know there was some volatility in there with December and January. So as we think about the first quarter relative to the 2% to 3% comp in the fourth quarter, I guess, overall, any puts and takes to consider? And similarly, for the full year, is any impediments to driving low single-digit comps in your view for the year at Dollar Tree?
Michael Witynski:
Yes. Overall, we don't see any structural or counter impediments. I -- last year, at Dollar Tree, Easter, as you know, did not happen just because it was at the peak of the beginning of COVID. And it did 2 things. It really impacted our first quarter sales at Dollar Tree and our margin at Dollar Tree because we didn't sell the high-margin Easter goods.
And then as you look throughout the year, I believe that as the country opens up and people get back to their routines and occasions start to begin to increase inside the churches and schools and families and weddings and all those things that are great for Family Dollar business, I see some upside throughout the year. And then as you just heard, at Christmas, the 10 days or 2 weeks leading to Christmas, because of COVID, completely shut down in traffic. So yes, I believe there's upside this year for Dollar Tree.
Matthew Boss:
That's great. And then just a follow-up on gross margin at the Dollar Tree banner. I guess when we put together the anniversary of the first quarter headwind, I think you were down 250 basis points plus, and then we consider the freight headwind that you walked through, how should we think about Dollar Tree banner gross margin this year versus that 35% to 36% target range?
Kevin Wampler:
Yes. I think a lot of puts and takes, as always, Matt. And I think, yes, as we've stated the last couple of quarters that we believe we can return to that 35- to 36-point range.
I think the one development that probably hinders that a little bit here as we go into 2021 is change in freight that is really a pretty new item to the -- size of that, I guess, is where I will speak to. So again, I think overall, I think there are things that -- I think our mix continues to be good. I think markdown will continue to be good. I think, obviously, freight will be the big bad guy there. I think shrink could be helpful. And I think after a couple of years of distribution costs rising, I think that maybe that could flatten out just a little bit. So there's many, many puts and takes, but I don't necessarily see it's getting back to that above 35% in 2021 right now with the freight headwind. That doesn't mean we can't get there, but it's a little bit of an uphill climb.
Michael Witynski:
Yes. Matt, this is Mike. What Kevin said is -- what I'm encouraged about is we just finished our January trip, which is our largest trip that we buy for the back half of the year. And our buyers did it remotely, but the value of the product, the excitement of the new product coming in for the back half of the year and the initial markup we're seeing on that product is exactly ahead our expectation.
And then as Kevin said, there's going to be some headwinds, but we'll figure out how to manage that. Just like we did with tariffs, as long as they're ahead of us and we know what it is, we will manage around that. And our mix is going to be favorable, too, at Dollar Tree as we -- the Crafter's Square and as we grow the discretionary side of the business this year, as the country begins to open up, that's the side that will benefit the most from this. And that's why I'm really excited about it. As the shrink -- as you know, the last 3 years, shrink has been a headwind at Dollar Tree and Family Dollar. And last year, we improved it, but we see some continued improvement as that -- in that area as well to help offset some other pressures.
Matthew Boss:
That's great color. So interpretation is just under 35% this year, but you have visibility, given the sourcing trips and the IMU, that you're seeing to be back in that 35% to 36%, just given the lead times and as the freight dissipates. Is that kind of the best way to think about it?
Kevin Wampler:
I guess the way to think about it, Matt, I think we've tried to describe the puts and takes the best we can at this point in time. It's obviously very fluid, and we'll continue to update you on -- we've tried to be very transparent this morning on all of these items affecting us, and we'll update you as we go forward.
Operator:
And it looks like we have time for one more question from Michael Lasser with UBS.
Michael Lasser:
So can you frame out the math a little bit that you provided? That was very helpful. So $279 million of COVID costs are going to roll off. You'll have $100 million that are going to be ongoing from the $25 million run rate that you provided for the fourth quarter. So that's a net $179 million benefit at the midpoint of the incremental pressure you're feeling from wages and freight, that $137.5 million. So all else equal, nothing else happens, your sales are flat, you should have $41 million of additional operating income simply from a mix of those 2 factors. And as part of that, can we then just kind of model out how we think sales are going to be and operating income would grow with sales, putting aside that other math?
Kevin Wampler:
Well, I mean, obviously, the puts and the takes that you talked to there, Michael, those are the numbers. And again, those are the big ones. There's obviously many things that happen in any given year. We're not giving specific guidance. I think I've helped as much as I can this morning in every way possible.
But again, I think you're right. The big items, I think -- we think we can offset. Again, there's plenty of other puts and takes at the end of the day. But we feel relative -- we feel good about our business. We feel good about where we're going to be in 2021 and the opportunities ahead of us. And I don't know that I can give you a whole lot more guidance beyond that.
Michael Lasser:
Okay. I literally just got several messages that, I guess, to make a counterargument to that math, which is all of that's true except for Family Dollar is going to be down potentially in the year ahead and will have to lap some unique benefits. So can you put any frame or reference around how we should think about -- what was unique to Family Dollar in 2019 that's really just not going to repeat? I know that's a big point of uncertainty, but that seems to be where it lies right now. And then I have one last follow-up on Dollar Tree Plus!.
Kevin Wampler:
I mean Family Dollar, I mean, you heard us talk this morning about our initiatives. You heard us talk about the opportunities that we have with the H2 and the combo stores. You've heard us talk about how we believe we are truly making a difference in building out our discretionary business and that it's a big -- it's not just big for sales, it's big for margin. It's big for customer satisfaction, return trips and all the things that go with that. So I think those are the things that we're working on hard day in and day out.
I don't think anybody can truly project stimulus, how fast the economy will bounce back and all those things that are going to go into it at the end of the day. So we feel good about where we're at. That's where we stand today.
Michael Witynski:
Yes. Mike, well, I just want to reiterate the enthusiasm I have for both banners and where we're at with our formats, with the strategy that our merchants are working on was cycling last year's pandemic. And again, our capital structure, we are in the best position we've been in, in 5 years, and we've got a bright future. And our merchants are going to continue to do the things they do every day and get better, and we're going to keep growing the company.
Michael Lasser:
Yes. And these reasons, very clear from the messaging you're providing. So that's helpful. And then my last follow-up is on the Dollar Tree Plus! concept. You stated that it's exceeding your plan. What's holding you back from rolling this out faster than the 500 locations that you're currently in the process of deploying to? And how does the overall financial performance of the Dollar Tree stores look in terms of sales, operating income dollars and margin?
Michael Witynski:
Yes. And again, we're going to -- that's why we're rolling it out to another 500, it's to continue this test. We had 120 stores, and we bought seasonal items and items for the back half of the year, and we exceeded the sales that we expected. So our customers are responding favorably. And what I've shared in the past is we will continue to look at the overall store sales, the overall margin and the profitability of those stores. And those, we want to see improve.
And the tough thing is, with everything going on last year, with everything I just described with COVID, it was really hard to lift our head up and say, did the 10% of the store in the DT Plus! really drive those things that I just described. So we're going to keep testing and refining and rolling this out, but we like the results we're seeing so far.
Operator:
All right. And that concludes today's question-and-answer session. Mr. Randy Guiler, I'd like to turn the conference back to you for any additional or closing remarks.
Randy Guiler:
Okay. Thank you, Jordan, and thank you for joining us for today's call and for your continued interest in Dollar Tree and Family Dollar. Our next earnings conference call to discuss Q1 results is tentatively scheduled for Thursday, May 27, 2021. Thank you, and have a good day.
Operator:
And this does conclude today's call. Thank you for your participation. You may now disconnect.
Operator:
Good day, and welcome to the Dollar Tree, Inc.'s Third 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, VP, Investor Relations. Please go ahead, sir.
Randy Guiler:
Thank you, Shelby. Good morning, and welcome to our call to discuss Dollar Tree's performance for the third quarter. With me on today's call will be our President and CEO, Mike Witynski; and our CFO, Kevin Wampler.
Remarks that we will make today about future expectations, plans and prospects for the company represent forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Results may differ materially from those indicated by these forward-looking statements due to various factors included in our earnings release, 8-K, 10-Q and annual report, 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. Following our prepared remarks, we will open the call to your questions. Please limit your questions to one and one related follow-up question. Now I will turn the call over to Mike Witynski, Dollar Tree's President and Chief Executive Officer.
Michael Witynski:
Thank you, Randy. Good morning, everyone. 2020 has proven to be the most unpredictable and unique year in my 40 years in retail. Nearly every business, family and person, has had to adapt and react to what is currently a new normal. My heart goes out to every family that has been impacted to some degree by the coronavirus. I would also like to give a shout out to all the medical professionals, frontline workers and others who are working tirelessly to ensure that we stay safe and healthy.
In an environment where individuals are concerned about their health and exposure, about their income and jobs, and about their not knowing what is next, I firmly believe that Dollar Tree and Family Dollar are part of the solution. Our 15,000-plus stores are close to home and easy to shop, providing great convenience and we offer a broad assortment of tremendous values to meet both needs and wants. I'm incredibly proud of our team's effort in the third quarter to continue serving customers effectively, while driving operational improvements in both banners through this extremely dynamic retail environment. The team delivered an earnings per share increase of 28.7% compared to the prior year's quarter. These enterprise results were comprised of a 5.1% same-store sales increase, a 150 basis point improvement in gross profit margin and a 130 basis point increase in operating profit margin. Our Dollar Tree segment delivered its strongest same-store sales performance in the past 10 quarters with a 4% increase. Gross profit margin improved 70 basis points to 34.9% versus Q3 a year ago, and operating margin increased 50 basis points to 12.7%, which represents a 300 basis point improvement from Q2. The quarter included $28.6 million in COVID-related costs. Geographically, comp sales were positive in all zones. For the quarter, discretionary delivered a positive 10.2% comp and consumables were down approximately 2.6%. We did see sequential improvement in consumables throughout the quarter as inventory flow of high-demand products improved. Categories performing well, included crafts, party celebrations, household products, kitchenware and even early Christmas season. The performance of Crafters Square offering that was rolled out into approximately 2,400 stores in Q1 of this year has been outstanding. We plan to add Crafters Square to the remainder of the Dollar Tree stores in early 2021. The Halloween seasonal sell-through was our best ever. Overall, the Fall Harvest and Halloween seasonal categories delivered a combined 9.4% comp for the quarter. Our merchants continue to hit a home run on identifying and sourcing great products that customers love at the dollar price point. Customers are continuing to shop early to celebrate events and holidays. Our sales continue to be delivered by average ticket, which increased 19% as consumers continued to consolidate trips. Our 12.6% transaction count decline was a 300 basis point plus improvement when compared to 15.9% drop that we saw just a quarter ago. We believe this is directly related to shopper mobility. Many people are working from home, learning from home or simply not going out as often, but when they do visit the store, they are filling their baskets. Ticket was up 19% this quarter and 22.6% last quarter. We continue to like the results we are seeing with the Dollar Tree Plus, and we are pleased to announce we are expanding the program to a total of approximately 500 stores beginning in the spring. Based on our learnings, we have continued to test, refine and improve this initiative since the initial launch in mid-2019. The merchant and store teams have done a tremendous job. Our customers are buying these products and sales of our multi-price items continue to grow. In fact, we are seeing that when multi-price items are included in the basket, the average transaction value is approximately twice the size. Recently, we've been seeing phenomenal sell-through of Dollar Tree Plus! items and seasonal merchandise. We are expanding our discretionary assortment to focus on sales and margin-driven categories that do not cannibalize current sales, are accretive to the business and bringing great value to our customers. These $3 and $5 items will also be leveraged through our Family Dollar stores when it makes sense. This is an example of harnessing the power of 2 brands by bringing Dollar Tree and Family Dollar together. We now have a new merchant team dedicated to these multi-price items that will benefit both banners. Family Dollar sales highlights for the third quarter included the 6.4% same-store sales increase was on top of the 2.3% comp in Q3 a year ago. This was comprised of a 21.3% increase in average ticket, partially offset by a 12.3% decline in transaction count. The ticket and traffic trends are relatively balanced throughout the quarter. The sales strength was broad-based geographically with each zone delivering positive comps ranging 4.7% or better. Categories performing well are many of the discretionary categories that we have been focused on improving, including home decor, household products, toys, electronics and apparel. Both rural and urban Family Dollar stores delivered mid-single-digit comp increases with rural slightly outpacing urban. Regarding the cadence of comps, each month's increase was greater than 5.5%, with September being the strongest month and October slightly better than August. The consumable side of the business delivered another positive quarterly comp at 4.1%, and discretionary comp was strong at 14.6%. On our March call, I discussed the challenge and opportunity to enhance the discretionary performance at Family Dollar through improved product assortment, sharper price points and greater values. Customers are noticing and they are responding.
In Q3, discretionary, as a percent of our net sales at Family Dollar, increased 140 basis points to 21.5% of sales. Our discretionary grew 2x faster than the total market in Q3. During the quarter, we launched the ability to sell product directly on our website at familydollar.com, providing customers another way to access great values. Additionally, we are early in the test phases of the following initiatives:
buy online, pick up at store; and delivery options through Instacart and Shipt. There will be more to come on future calls.
As I mentioned on our call 3 months ago, it's a new day at Family Dollar. I continue to be very pleased with the team's overall progress. We are 3 quarters into 2020 with an operating margin of 5.1% compared to 2% 3 quarters into 2019. The key elements of our improvement plan include:
improved merchandising and marketing, raising stock and raising store in-stocks, upgrading brand standards, creating a selling culture and refining our format strategy.
I would also like to recognize Dollar Tree Canada. Our Canada President and Chief Operating Officer, Neil Curran and his team are hitting on all cylinders. During Q3, Dollar Tree Canada opened 2 new stores, bringing the total to 230 stores north of the border. Canada exceeded its plan of sales, gross margin and operating income, delivering low double-digit comps in both consumables and discretionary, including very strong seasonal sales on Fall Harvest and Halloween, and they have improved on store manager turnover and internal promotion as a result of their continued focus on people development. Regarding real estate, the team completed more than 550 projects in the quarter, including 143 new stores, 34 relocations, 371 Family Dollar H2 renovations, and we had 16 store closings. We ended the quarter with 15,606 stores. I'll now toss it to Kevin to provide more detail on the Q3 performance.
Kevin Wampler:
Thanks, Mike, and good morning. For the third quarter, consolidated net sales increased 7.5% to $6.18 billion, comprised of $3.3 billion at Dollar Tree and $2.87 billion at Family Dollar. Enterprise same-store sales increased 5.1%. On a segment basis, comps for Family Dollar increased 6.4% and for Dollar Tree increased 4%. Dollar Tree's comp represented its best quarterly same-store sales performance since Q1 of 2018.
Overall, gross profit for the enterprise increased 12.9% to $1.92 billion. Gross margin improved 150 basis points to 31.2% compared to 29.7% in Q3 of 2019. Gross profit margin for the Dollar Tree segment increased 70 basis points to 34.9% when compared to the prior year's quarter. Factors impacting the segment's gross margin performance included merchandise costs, including freight, improved by approximately 95 basis points. Dollar Tree saw an improvement in merchandise mix and lower freight costs as a percentage of sales, partially offset by reduced markups. Occupancy costs decreased approximately 20 basis points due to leverage on the comp sales increase in the quarter. Shrink improved approximately 10 basis points. These improvements were partially offset by distribution costs that increased 50 basis points, primarily due to higher payroll costs and depreciation. This includes the continued ramp-up for the 2 new distribution centers as well as approximately $6.6 million or 20 basis points of COVID-related expenses, primarily premium pay and bonuses.
Gross profit margin for the Family Dollar segment improved 230 basis points to 26.8% in the third quarter. The year-over-year improvement was due to the following:
shrink improved to 70 basis points based on inventory results in the current year and cycling an increase in the accrual rate during the prior year. Merchandise costs including freight improved 60 basis points, primarily due to a balanced improvement in merchandise mix and markdown.
Occupancy cost decreased approximately 60 basis points as a result of leverage from the comp sales increase and markdown expense improved approximately 40 basis points due to lower promotional activity and improved sell-through of seasonal merchandise and apparel. As a percentage of net sales, distribution costs were flat compared to the prior year quarter. The current year quarter included approximately $4.3 million or 15 basis points of COVID-related expenses, primarily premium pay and bonuses. Consolidated selling, general and administrative expenses increased 20 basis points to 23.7% of net sales compared to 23.5% in Q3 a year ago. For the third quarter, the SG&A rate for the Dollar Tree segment as a percentage of net sales increased to 22.2% compared to 22% in Q3 of 2019. Payroll costs increased approximately 50 basis points based on payroll expenses increasingly -- increasing $17.3 million or 50 basis points for costs associated with COVID-19 premium paying bonuses. Store facility costs decreased 15 basis points, primarily due to leverage of the stronger same-store sales and lower electricity costs. Other selling, general and administrative expenses decreased approximately 5 basis points, primarily from lower travel and legal costs. The SG&A rate for the Family Dollar segment improved approximately 20 basis points to 22.2% compared to 22.4% for the third quarter of 2019. Other selling, general and administrative expenses decreased by approximately 20 basis points, primarily due to lower advertising and travel costs as a percentage of net sales. Store facility costs improved approximately 20 basis points, primarily from leverage on comp sales and lower electricity costs, and depreciation improved 10 basis points, primarily from leverage on comp sales increase. These benefits were partially offset by payroll expenses, which increased approximately 35 basis points driven by COVID-19 costs of $11.4 million or 40 basis points for premium paying bonuses and increased incentive compensation based on performance. Operating income increased 29.9% to $465.5 million compared with $358.4 million in the same period last year, and operating income margin improved 130 basis points to 7.5% compared to last year's third quarter. Current year quarter included $46.3 million in COVID-19-related expenses in total. Nonoperating expenses totaled $38.2 million comprised primarily of net interest expense. Our effective tax rate was 22.8% compared to 19.3% in the prior year's third quarter. Current quarter rate reflects higher state tax rate and higher income amounts taxed at the statutory rate. Prior year rate reflected a larger benefit from the reconciliation of the tax provision to the tax return. The company had net income of $330 million or $1.39 per diluted share, which included $46.3 million or $0.15 per diluted share of incremental operating costs for COVID-19-related expenses. This compares to net earnings of $255.8 million or $1.08 per share in the prior year's quarter. Combined cash and cash equivalents at quarter end totaled $1.12 billion compared to $539.2 million at the end of fiscal 2019. Company paid down the remaining $500 million on its revolving line of credit during the quarter. Outstanding debt as of October 31, 2020, was $3.55 billion. During the quarter, we purchased nearly 2.2 million shares for $200 million. At quarter end, we had $600 million remaining in our share repurchase authorization. We will continue to provide post-quarter updates on share repurchase activity. Inventory of our Dollar Tree at quarter end declined 1.8% from the same time last year, while selling square footage increased 4.2%. Inventory per selling square foot decreased 5.8% and inventory levels are well positioned for the holiday selling season. Inventory for Family Dollar at quarter end decreased 2.9% from the same period last year, while selling square footage increased 1.1%. Inventory per selling square foot decreased 4%. Our inventory levels improved in Q3, and we continue to be more productive with lower inventory, significantly increasing our inventory turns. Capital expenditures were $238.7 million in the third quarter versus $279.8 million in Q3 last year. And for fiscal 2020, we continue to expect consolidated capital expenditures to be approximately $1 billion. Depreciation and amortization totaled $170.1 million for Q3 compared to $160 million in the third quarter last year. As for fiscal 2020, we now expect consolidated depreciation and amortization to be approximately $680 million. While we are not providing sales and EPS guidance, I do want to provide a few data points for your modeling. Net interest expense is expected to be approximately $37 million in Q4 and $151 million for fiscal 2020. The tax rate is expected to be 22.3% for the fourth quarter and 22.8% for fiscal 2020. Weighted average diluted share counts are assumed to be 236.3 million shares for Q4 and 237.5 million shares for the full year. We have a strong balance sheet and continue to grow the company by investing in both new and renovated stores, our supply chain and technology to improve the customer experience. We remain confident in our business and our ability to drive long-term shareholder value. I'll now turn the call back over to Mike.
Michael Witynski:
Thanks, Kevin. We certainly have momentum in our business. For Q3 in a challenging retail environment with government stimulus mostly behind us, we delivered very solid enterprise results, including a positive 5.1% comp, 150 basis points of gross margin improvement and 130 basis points of operating margin improvement despite incurring more than $46 million in COVID-related costs. Additionally, we completed more than 550 real estate projects, paid down the $500 million drawn on our revolving line of credit and repurchased $200 million in stock. Our strong balance sheet provides us the flexibility to grow the business and create shareholder value.
It is still very early, but I am encouraged by our start to the current quarter. We are just over 3 weeks into our important fourth quarter, and we are off to a very good start with same-store sales at both banners currently tracking above reported third quarter levels. We are truly leveraging the power of both brands. Actions taken in 2019, including the consolidation of store support centers and the alignment of organizational leadership under one team are paying off. Examples include:
we are experiencing improved accessibility to a broader base of manufacturers and vendors by going to market as a 15,000-plus store chain. Many vendors are willing to work with us to support both the dollar price points as well as price points above the dollar. Our merchant teams are harmonized to act with clarity, focus and speed.
When the first COVID wave hit in March, we took action to derisk the Halloween season and actually saw the best sell-through in company history. This fall, we modified our assortments away from the traditional cold and allergy and to more focus on health products, vitamins and face covering. We also made strategic buys on paper, soaps and sanitizers to get ahead of the curve as COVID cases were expected to pick up in the second wave. Our seasonal businesses, both at Dollar Tree and Family Dollar are doing very well. We are able to be a convenient shopping trip to meet the needs of those staying at home, eating at home, working at home and/or learning at home. We are seeing greater sales of seasonal product as it hits our stores. Customers are buying ahead and not waiting until the last minute. This is resulting in better sell-through and reduced markdown exposure. We will continue to develop new strategic store formats so we are able to better serve our customers while improving store productivity, margins and returns. We want formats that utilize the best of both brands to serve customers in all types of geographic markets. This will be a story of evolution, change and improvement. Our gross margin return on investment or GMROI at Family Dollar is the highest it has been since we have owned the business. This is a combination of improved sales, gross margin and inventory returns. An example is our apparel category where we delivered a significant improvement in sales and margin with material-less inventory. This is while the overall market has been down for apparel. We are focused on delivering the basics at greater values, sharper price points. The team has undergone a significant amount of work to get us to this stage with one consolidated store support center, a strong balance sheet and an aligned, energized and focused leadership team and a full staff of talented retailers. We believe we have the ability to better serve customers across North America. Our actions represent a transformational opportunity to leverage the power of both of our brands through flexible store formats designed to drive operational results and enhance shareholder value. Before we go to your questions, I'd like to wish all of our stakeholders, a safe and happy holiday season. I believe we are all looking forward to the arrival of 2021. It's almost here. Operator, we are now ready to take questions.
Operator:
[Operator Instructions] We'll take our first question from Simeon Gutman with Morgan Stanley.
Simeon Gutman:
Nice quarter. I'll ask one and a follow-up as one full question. First, the quarter-to-date acceleration at both banners, what do you attribute it to? Is there any stocking up going on at the Family Dollar banner? And you mentioned maybe some -- like shopping earlier. Is there any signs of pull-forward of holiday spending?
And then I just want to go back to the Dollar Tree Plus! for a second. It sounds like you are excited. The initial results are good. I guess my question, a little tongue-in-cheek, is, why did it take so long if it sounds like it's so successful? Why didn't it come sooner? And anything about the current backdrop that could be unreliable as a test?
Michael Witynski:
Thanks for the question. Yes. So quarter-to-date, we are seeing some of the stack up right now. It's not quite at the level as it was back in March and April. We're estimating at about 30% of the rate it was earlier in the year, but we can see that they are stocking up now. And the seasonal pull-through is some pull-forward sales. We do see they are buying earlier and decorating their homes, and that's really helping us a lot in our sell-through. We have less markdowns and so there's less exposure there and ability to get more product out on our sales floor.
Regarding Dollar Tree Plus!, while I know it seems like it takes long, but this is really -- it's similar to other tests that we have. When we have our Crafters Square, we tested it in 3 or 4 stores, then we put it out into 800 stores and then rolled it out. And now we're rolling out to the chain and that took probably 18 months to 2 years. It's just that we didn't show you all the backdrop of the early testing. And we took the same pace as we were looking in our snack zones at Dollar Tree. We tested that for a year in stores and refined it and then rolled it out to a certain amount of stores and then began our process. So this is what we're doing, the same process. We want to make sure it's right and aligned, and we've even learned a lot from our process by shifting a lot from consumables into the discretionary items that the customer really wants that we can bring great value in. And it also takes our buyers' time to go -- these are import items and we actually manufacture and create these items to be a great value and a wild factor at the $3 and $5 price point. So we want to make sure it's the right thing, and it's adding value to our customers and to our company as well.
Operator:
We'll take our next question from Edward Kelly with Wells Fargo.
Edward Kelly:
So Mike, just a follow-up on Dollar Tree Plus!. I was hoping that you could provide a bit more color on the actual decision to expand the test. Any more detail in terms of what you've seen from a sales lift or a margin impact in the stores where the product is currently? Why is 500 stores the right number? And then it's notable that you have a team that's now focused on this product internally. So what does that say about where we go from here?
Michael Witynski:
Yes. Well, I think the first answer is that we're organizing around the strategy. So that tells you that there is commitment there that we want to find great products at the $3 and $5 price points, and it gives us the ability to also leverage that across both banners where it makes sense. And the 500 is, it gives us -- we're actually rolling it out to more distribution stores and we look at stores that are sized appropriate, where we can bring this product into those stores. So 500 is an estimate of stores around those distribution centers. And it also gives us enough stores to really see how it continues to grow and improve and how our customers respond.
We like the results. We can tell that the sales are growing compared to when the sales of the consumable items, they're reacting more. So the overall sales of these items are growing. The challenge we have is, in the backdrop of the COVID with all the increase in sales and mix of the stores that how it shifted, it's really hard for us to isolate those specific categories in those stores. But it's easy enough there's enough evidence that the sales of those specific categories are doing well enough, and our customers are responding, that we're going to continue to roll it out and test it more. The things that we do like is even in the seasonal items, where the $3 and $5 items are really responding well and seasonal.
Edward Kelly:
And just a quick follow-up related to that. So I think it was about a year ago that when asked about this initiative, you guys had talked about how customer response that may be like 1/3 of customer has liked it, 1/3 were in different, 1/3 didn't like it. And I think it had people sort of thinking like maybe this is not something that would make sense. How has that customer response changed?
Michael Witynski:
Well, I think the #1 thing that we could see is the sales are up over the program when it was consumables. So we think that they're responding favorably because the products that we are buying are selling through at the rate we expect and it's continuing to grow.
Operator:
We'll take our next question from Matthew Boss with JPMorgan.
Matthew Boss:
Congrats on the performance guys.
Michael Witynski:
Thanks, Matt.
Matthew Boss:
Maybe first on Dollar Tree banner gross margins. What drove the 95 basis points of merchandise margin expansion this quarter? How best to think about puts and takes in modeling fourth quarter gross margin at Dollar Tree? And I know we've talked in the past about the return to 35% to 36% gross margin. Is there any impediment to getting there potentially next year at the Dollar Tree banner?
Kevin Wampler:
Matt, this is Kevin. So obviously, as we went through the quarter, mix was an important component of driving the improved merchandise margin, that and freight. So which again, mix moved about 300 basis points year-over-year towards discretionary, and that really speaks to obviously, things like Halloween, which Mike spoke to, we had a great sell-through; speaks to Crafters Square, which has just been a dynamic element in our stores.
So I think those are important things as we've seen that mix shift a little bit. And maybe a little counterintuitive of the fact that we saw improvement in freight. But you have to remember, a year ago, from a compare standpoint, we saw a pretty big increase a year ago from a surge standpoint, and so our comparisons were maybe a little bit different than some people. So we actually saw a little bit there. So I think that's important at the end of the day. So -- and again, I think we saw some leverage with the comp on occupancy, which, again, obviously, was a forward comp, we would expect leverage there. But as far as the 35% to 36%, this was our best gross profit in Q3 since, I believe, 2017. It gets us on track to basically, if we continue this type of trend, where we would be able to be in that 35% to 36% range. And again, nothing -- there is no barrier stopping us. So we just have to continue to build the business as we always have, and I think the discretionary side is very strong right now, and I think that's a big benefit as well.
Matthew Boss:
That's great. And then as a follow-up on the Family Dollar side, what have you seen from new customers relative to spending from existing customers more recently and the improved performance? How to think about retaining some of these new customers? And maybe larger picture, how do you envision, Mike, the Family Dollar comp story as we think about relative to the low single-digit historical comp profile at Dollar Tree? Do you see it similar? Do you see it lagging? What's the best way to think about Family Dollar multiyear relative to comps at Dollar Tree in your opinion?
Michael Witynski:
Yes. In my opinion, I see it similar to the Dollar Tree, low single-digit, continued growth year after year in comp store sales growth. I think both banners should be able to settle into that with no problem. Regarding the new customers, we -- what we're seeing is just overall, it's very similar to new and old, as I shared in the prepared remarks that when the customers are coming into the store, they are shopping with intent. And what we do like to see is they're shopping the entire store in the discretionary side that we are working so hard on to fill that basket, and we're seeing our discretionary side grow with both new and old customers.
Operator:
We'll take our next question from Brad Thomas with KeyBanc Capital Markets.
Bradley Thomas:
Nice quarter here. I was hoping you could give a little color on how you all are starting to think about 2021 at this point. Clearly, 2020 is shaping up to be a good year for you all, but there are also some dynamics like traffic that have been challenges for you. I guess how are you thinking about some of the puts and takes at a high level at this point for next year?
Michael Witynski:
Matt, we're all looking forward to 2021. I think -- the way I think about it, I do think that customers, the dynamic in their shopping patterns have changed, and I think it's going to be slow to change. I don't think there's going to be a light switch that's going to turn on and all of a sudden, they'll go back to their old shopping patterns and activity. I think we will keep going after driving that basket size, and when they are in our stores, drive it with intent.
Kevin Wampler:
I think the other thing, Brad, is, obviously, as Mike laid out early this year, focus on discretionary business in the Family Dollar store. And obviously, we've had the pandemic this year, which is obviously muddies the water a little bit, but it's obviously an area that we feel where we can drive new business and convert more customers at the end of the day.
The team continues to work cross-functionally to build out those assortments, and we saw our best Halloween sell-through in the time we've owned Family Dollar this year. So that tells us that we can sell seasonal. It can be a bigger part of the overall business, and it needs to be part of our overall business, a bigger part as we go forward. So it's going to be a continued focus, just like we talked about early this year.
Bradley Thomas:
Great. And if I could ask a follow-up on the H2 stores. You talked about your plans for the multi-price expansion on the Dollar Tree side. Do you have a target at this point for how many H2 renovations you'll do next year? I know you pared back a little bit this year in the COVID backdrop? How are you thinking about those models next year?
Kevin Wampler:
Yes, Brad, you're right. This year, about 750, H2. We ended the year expecting to about 1,250, but obviously, COVID kind of gotten in the way of that. We do expect 1,250 additional H2s in 2021 to continue that process forward. It continues to be something that we can build upon. Our customers really like the layout and the offering and the assortment, and it's an important part of the growth as we go forward.
Operator:
We'll take our next question from Peter Keith with Piper Sandler.
Peter Keith:
Maybe just to touch base quickly on some of the gross margin trends. This looks like the first time in a while where shrink is now a tailwind. So have you gotten over the hump where you think you've controlled shrink? And can you continue to see some benefit there? And similarly, on gross margin, freight has a nice tailwind for Q3, but we have seen freight rates jump rather dramatically. How should we think about that impact in the fourth quarter?
Kevin Wampler:
Yes. Two really good questions. Thanks for the question, Peter. I think as we look at it, shrink, we did see some nice improvement. Again, it has been a headwind for much longer than it should have been. And as I've stated before, it's been front and center on many people's desks. I would tell you, a good call out for our operators and our asset protection team. We've made progress. We've got some momentum. I would tell you, we are not where we need to be, overall, yet.
Our goal is to be not just good but to be class-leading as it relates to this, and we have more work to do. But the good news is, we have some momentum, which is very, very positive. Do I expect it to be a benefit? I think it could be a benefit as we go forward into Q4, albeit not to the same rate on the Family Dollar side because we were cycling a fairly big increase in the accrual rates in Q3 a year ago, but I do believe there can be some improvement there. As it relates to freight, I would tell you, while it was a good guide for us in Q3, I expect that to be somewhat tempered in Q4. To your point, again, as I stated earlier on the call, Q3 last year, our freight was significantly high due to surge, costs and just moving trailers. We have seen some of that increase that you just spoke to in the rates. The team -- the transportation team is working really hard to mitigate every dollar they can but I don't expect it to be the same type of benefit in Q4 than it was in Q3. And then we saw more of that on the Dollar Tree side than we did on the Family Dollar side, just from a banner specific side -- I think -- way to think of it. So it's kind of how those 2 items look to play out as we go forward.
Peter Keith:
Okay. Maybe a separate question for Mike. Mike, you pushed out some omnichannel initiatives, it looks like you're looking at BOPIS for Family Dollar. Maybe give us a little bit of sense on what you guys are playing out with there? And is it only on the Family Dollar business where you're looking at that? Or would you think about more omnichannel investment needed for Dollar Tree as well?
Michael Witynski:
Yes, thanks for the question. It's a great question. We think it's critical. And especially after this year, as you've seen by others and how the customer is really moving into the omnichannel and using that. So we definitely are going to build that capability at both Family Dollar and Dollar Tree. And like we have organized around our Dollar Tree Plus!, we are organizing around our omnichannel business as well. We've got a new leader there, who's got great experience, and we will accelerate our capabilities.
Operator:
We'll take our next question from Chandni Luthra with Goldman Sachs.
Chandni Luthra:
This is Chandni Luthra at Goldman. Just building up on that last question on omnichannel. You've also talked about introducing delivery at Family Dollar. If you could provide any color on what early reads are? What sort of customer is buying back? What the delivery basket is looking like? And finally, how do you think about economics with Family Dollar, economics to ship-to-home with Family Dollar?
Michael Witynski:
Yes, it's really early. We launched it mid- to late quarter. I would say, we really like the basket size. We like the product that they are buying inside the basket, and we're excited about offering that opportunity to our customers as they shift in some of their behaviors. The beautiful thing is, we've got -- we are 15,000 store chains, and we're conveniently located in their neighborhoods and close to their stores. And then when we combine that with their ability, should they want to buy online or pick up in store or get it delivered at home, we're going to have that capability as well. But it's really early for us, but we do like the basket we're seeing and the mix of the product.
Chandni Luthra:
Got it. And I guess my follow-up is a little bit long-term as we sort of think about 2021 and beyond. There is a lot of talk about raising the federal minimum wage threshold. Could you perhaps give us color in terms of what percentage of your employees are in minimum wage? How do you think about if that headwind were to come about? How should we think about that?
Michael Witynski:
Yes, that's a good question because we think about that a lot. And as a minimum, as you can imagine, the state minimum wages are all over the Board, and it's hard for me to -- it would be a different number by state and geography, but there are probably 6 to 7 states already on their path to that $15 an hour minimum wage that they've announced several years ago, and they're on their path to that.
So our operating teams are absolutely working on driving, first and foremost, in-store efficiencies. You look at -- if you can bring in technology and self-scanning to help leverage some of your resources that way. Our merchants continue to look at merchandising methods through shelf-ready PEQs and then distribution methods. I mean, those are our 3 levers that we can pull:
our operators in the store, technology, distribution and the product our merchants are buying are all the things that we actively are going to be working on.
Operator:
[Operator Instructions] We'll take our next question from Michael Montani with Evercore.
Michael Montani:
Just wanted to ask, first off, on flow-through rates, if I could, for the fourth quarter. Third quarter was quite healthy in the mid-20% range. So I just wanted to see if there's any puts and takes that you would call out to think about at the enterprise level, if that is sustainable? And then I just had a follow-up on Dollar Tree Plus!.
Kevin Wampler:
Yes. As it relates to flow through, it was a very good month -- or a very good quarter, I should say, in regards to flow through. Obviously, we've got significant leverage across both businesses, and we saw obviously help on the mix, in particular, from both to help gross profit. Generally, as you go into Q4, I would tell you, where I do expect gross profit to improve year-over-year, but not at the same rate as on a consolidated basis as it did in Q3, just based upon some of the things that we won't necessarily repeat, which we've talked about today. So shrink may not be a big of a help and freight may not be as big of a help and things like that. So the flow-through probably won't be quite the same on total gross profit.
But in general, Q4 does tend to be a higher discretionary period for Dollar Tree in particular, and we see some of our traditionally some of our highest margin out of all of our four quarters. So some put and takes there. I think, obviously, we expect some improvement. It just won't be the same probably as much as what we saw in Q3.
Michael Montani:
Okay. That's helpful. And then if I could, just around Dollar Tree Plus!, I want to see if there's any incremental color that you could share in terms of how the stores were performing relative to the overall chain from a comp perspective when you roll out Dollar Tree Plus!? And if there's any incremental color perhaps related to that on incrementality, either in terms of shoppers or kind of basket size. Just any incremental color there?
Michael Witynski:
Yes, Mike, thanks for your question on the DT Plus!. As I shared earlier, right now, when you look at relative performance to other stores or prior the challenge we have is when we change to our 2.0 and brought in all our discretionary, it landed right in March. So there was so much noise around other stores and/or themselves that is really hard for us to determine the lift that was associated specifically to these products. And remember, the linear footage, it's still 10% to 11% of the total store. So it's hard to see what this is doing.
But the 2 things we do see, we like the sales that these are -- the product that we're putting in there at the $3 and $5 price point are selling. It's also selling at a much higher-margin because it's discretionary product, and we're able to manufacture these products and bring value to the customer. And then the third thing we can see is the basket size. When one of these items are in the basket, it is twice the basket size when they're not in there. Those are the things that we can see, and it gives us courage to keep moving forward, and we're going to keep on fueling it.
Operator:
We'll take our next question from Scot Ciccarelli with RBC Capital.
Scot Ciccarelli:
Scot Ciccarelli. I know you guys have made a really concerted effort to improve your discretionary mix. But have you been surprised by the magnitude of change in discretionary versus consumable mix? And then related to that, are there any supply issues with consumables? Or is that just not where your -- what your customer is looking for in today's environment?
Michael Witynski:
Scot, thanks for the questions. I'll answer the first, the consumable. We are chasing the product and the national brand, and it's the products that our COVID related and manufacturers are still trying to build up capacity. And it's in the paper, the hand sanitizers, the wipes and some consumable-related products. So we -- the inventory levels are improving from April, but they are still not caught up with the demand. So yes, we're still chasing a little bit of that and there's still some upside capacity there.
Kevin Wampler:
Scot, I think your question around discretionary and the strength there, I mean, obviously, I think, one, it does speak a little bit to the pattern of the consumer. They are buying closer to home, and so it's definitely a part of it. But it's really the categories that they're buying itself, right? So people -- as we've talked about, seasonal, in particular, has been good as people try to stay somewhat normal of what's been an unusual period of time, decorate their homes or supplement their soft home and our Family Dollar stores has done well. If you think about that as they kind of resupply their home and things like that and decor.
So a lot of things like that have done very well. Those are things we think we can provide on a regular basis. And I think it gives us the opportunity to show folks what we have in that arena and hopefully convert them to continued shoppers with us as we go forward. So it's a good opportunity as we continue to build out that assortment.
Michael Witynski:
Yes. And just a little bit more color on -- just a little bit more color on that. Our merchants have worked really hard at providing a much better value at sharper price points and it met the need for the last several months, as Kevin just described. So that is going to be going forward. Our merchants are going to continue to buy better, buy basics and buy great value and supply that to the customer from this point forward.
Operator:
[Operator Instructions] We'll take our next question from Paul Lejuez with Citi.
Paul Lejuez:
In response to an earlier question, I think it was Ed's on Dollar Tree Plus!. You mentioned something about doing it in stores that are close to the DC, I think. Just want to make sure I understood that and whether the Dollar Tree Plus! rollout would be in certain geographies.
Also, if you're happy with the test, are there any limits to how many stores could get this assortment, either because of store size or proximity to DC? And then just a follow-up, maybe a silly question, but why don't you like the even numbers $2 and $4 when you think about that Dollar Tree product?
Michael Witynski:
Yes. So the first one, the reason we're rolling it out, no, we're not limited by proximity to the DCs at all. It's really about bringing in these products into a DC, so you're bringing in and creating slots for the different items. And we're going to do our due diligence and roll this out and test. And the store size was really more related to -- we do not want to impact our single price point assortment that the customers used to in our stores. So we're looking for size of stores right now during the test that doesn't adversely impact that assortment. So that's the only reason we're doing that.
And then -- yes, on your question on the $2 and $4, we're looking for great value at great products. And the $3 and $5 price points seem to resonate more with our customers, and it differentiates itself from the Dollar price point. And we don't want to muddy the water with those in between products. We want to really focus on step changing items that we're selling for $3 and $5 that are really $7 and $10 items anywhere else in retail. So I want to -- we're trying to bring clarity to ourselves, to our merchants and for our customers on the value.
Paul Lejuez:
Got it. And just a follow-up on the store side. What percent of the fleet are large enough to handle that Dollar Tree Plus! assortment at this point?
Michael Witynski:
I do not have that right now with me. Well, we can -- Randy can get that for you.
Operator:
We'll take our last question from Michael Lasser with UBS.
Michael Lasser:
You outlined the diligent and disciplined process that you typically go through when you're rolling out initiatives from pilot to test to full rollout. Could you see any conditions under which you would roll back this test or this expansion of the test of 500 Dollar Tree Plus! locations, particularly given some of the opacity that you spoke about in determining the results of the initial 100 in the last 6 months. Then I have a follow-up.
Michael Witynski:
Yes. So I mean, so the obvious one, if it impacts -- if we had adverse implications to comp store sales in the stores and/or margin dollars, and it's not accretive to the business. I mean, that's what we're really looking for is that it's -- this program has to be accretive to sales margin and operating income and that's what our expectations are.
Michael Lasser:
Have you gotten to a point like this where you expanded the test and then subsequently had to roll back the test?
Michael Witynski:
I'm sorry, what was the question?
Michael Lasser:
Have you gotten to a point like this where you've taken a test to the next level and then subsequently have had to roll it back?
Michael Witynski:
I can't remember one to this level, no. We've got certainly a lot of tests out there that we never went forward with, but no, not to this level.
Michael Lasser:
And my follow-up question, Mike, is on framing the Family Dollar consumable business, which increased in the 4% range in the most recent quarter. If we compare that to a lot of the results from the other consumable retailers, it was a bit slower and perhaps suggests that the Family Dollar's market share in those categories was lagging behind others. How do you think about that and how do you see the ability to improve share from this point for Family Dollar?
Michael Witynski:
Yes, that's a great question. But first and foremost, it was a positive low single digits. So we continue to grow our consumable sales. And 9 months ago in March, we were talking about how consumable has always been healthy for the Family Dollar business, and I foresee that continuing to grow. And we're going to keep doing the same thing as we are on the discretionary side.
We're bringing great values. We're going to have the right assortment. We're going to sharpen our price points to be competitive in the marketplace. And we are chasing the inventory. I would say on the consumable side, we are not happy with our everyday in-store stocks on consumables. So we believe that we can build that business going forward.
Operator:
That concludes today's question-and-answer session. At this time, I will turn the conference back over to Randy Guiler for closing remarks.
Randy Guiler:
Thank you, Shelby, and thank you for joining us for today's call and for your interest in Dollar Tree. We would like to wish our best wishes to all of you for a happy and safe holiday season. Our next earnings conference call to discuss Q4 and full year results is tentatively scheduled for Wednesday, March 3, 2021. Have a good day.
Operator:
This concludes today's call. Thank you for your participation. You may now disconnect.
Operator:
Good day, and welcome to the Dollar Tree, Inc. Second Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Randy Guiler, VP, Investor Relations. Please go ahead, sir.
Randy Guiler:
Thank you, Shelby. Good morning, and welcome to our call to discuss Dollar Tree's performance for the second fiscal quarter of 2020. With me on today's call will be our President and CEO, Mike Witynski; and our CFO, Kevin Wampler.
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 annual report, 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 1 and 1 related follow-up question, if necessary. Now I will turn the call over to Mike Witynski, Dollar Tree's President and Chief Executive Officer.
Michael Witynski:
Thank you, Randy. Good morning, everyone.
I'm very pleased with the company's second quarter results announced this morning. Our store and distribution center teams have done a remarkable job of serving customers through an incredibly dynamic time in retail. Their continued efforts to ensure we are providing a clean, safe shopping experience, along with great value and convenience our stores offer, contributed to our solid operating performance for the quarter. Our team delivered an earnings per share increase of 44.7% compared to prior year's quarter. These results for the enterprise were comprised of a 7.2% same-store sales increase, a 180 basis points improvement in gross profit margin and a 130 basis point increase in operating profit margin. Same-store sales increased 11.6% at Family Dollar and 3.1% at Dollar Tree. It's a new day at Family Dollar. In early March, on our Q4 earnings call and following our December leadership realignment, I spoke about the challenge and opportunity to turn around discretionary side of the business at Family Dollar. Our focus is on greater values and sharper price points with an enhanced focus on meeting the basic needs of our customers. It's all about sourcing more of the items customers want to buy. Our team's efforts are paying off as Family Dollar delivered a record 28.9% same-store sales increase and discretionary for the quarter. Our realigned and focused merchandising team is demonstrating how they can be nimble and opportunistic to drive sales, loyalty and repeat visits at Family Dollar. Examples of this included, following on the success we experienced at Dollar Tree, we have now completed the rollout of Hallmark-branded greeting cards to all Family Dollar stores. We are capitalizing on great brand name closeout opportunities, which is a relatively new approach at Family Dollar. We introduced what could be the top toy of the year, Baby Yoda, and sold tens of thousands in a matter of days. As the quarter progressed, we saw a shift from kitchenware and tabletop into more home decor and soft home as customers are investing in their homes and spending more time in their homes. Anything related to staying at home, such as lawn and garden and outdoor grilling, continues to perform very well. And on the apparel side, we have had strong sell-through of our spring and summer apparel with a focus on our at-home items like loungewear, sleepwear, slippers, athleisure, children's clothing as well as newborn and onesies. Family Dollar's 11.6% comp reflected the continuation of momentum that we saw in Q1 as customers are viewing Family Dollar as a convenient, safe, local option with great values on food, essentials, household products, cleaning supplies, home decor and much, much more. The strong performance in discretionary contributed 390 basis points improvement in gross margin, and operating income margin for Family Dollar in Q2 increased 470 basis points to 5.3%. Other Family Dollar sales highlights for the second quarter included the 11.6% same-store sales increase was on top of a 2.4% comp in Q2 a year ago. This was comprised of 25.9% increase in average ticket, which was partially offset by an 11.3% decline in transaction count as customers continue to consolidate their shopping trips. The sales strength was broad-based geographically, with each zone delivering comp increases between 9.5% and 13.5%. Also, both rural and urban Family Dollar stores delivered double-digit comp increases, with rural slightly outpacing urban. Regarding the cadence of comps, each month's increase was greater than 8.5%, with May, which had the greatest benefits of stimulus, being the strongest month. And June was slightly stronger than July. While it is still early in Q3, Family Dollar is delivering very solid same-store sales despite less government assistance being available than during the prior quarter. The consumables side of the business delivered another positive quarterly comp at 6.3%. While as previously mentioned, the discretionary count was a record 28.9%. We saw more than 0.25 million new sign-ups in our smart coupon program during the quarter, bringing its total enrollment to 12.8 million customers. Our H2 stores continue to perform very well, delivering year 1 cap lifts greater than 10% when compared to non-renovated stores. For fiscal 2020, as previously stated, we plan to renovate 750 Family Dollar stores while new stores are also being open in the H2 format. For the Dollar Tree segment, Dollar Tree bounced back with a 3.1% same-store sales increase for Q2 following a quarter where Easter seasonal performance was materially impacted by COVID-19. Gross margin, which was down 260 basis points year-over-year in Q1, was down 10 basis points for the second quarter. This sequential improvement was primarily due to the rebound on the discretionary side of the business following Easter. Geographically, comp sales were relatively balanced with increases by zone ranging from 1.2% to 4.25%. For the quarter, discretionary delivered a positive 9% comp, and consumables were down approximately 3%. The comp sales for every line of business at Dollar Tree improved from quarter 1 to quarter 2, with the exception of the food category. Factors impacting food include reduced availability of protein products from periodic plant shutdowns, slowed sales of impulse snacks as traffic has declined, and some vendors are focusing more on larger pack sizes based on demand and their production capacity. Categories performed well in the quarter include crafts, kitchenware, housework products, party celebrations, and beauty and eyewear. The Crafter's Square program is a tremendous hit with our customers and is driving repeat visits to our stores. Our timing with the rollout of more than 2,400 stores in Q1 could not have been better. The improved performance in the basic craft assortment is also contributing to a lift in our seasonal craft business as well. For the quarter, Dollar Tree's transaction count was down 15.9%, while average ticket increased 22.6% as consumers, in general, have been shopping less, but buying more. Q3 has gotten off to a good start at Dollar Tree as well. Regarding upcoming seasons, like back-to-school, Fall Harvest and Halloween, we are seeing more volatility than usual on the timing of back-to-school sales. But the good news is these are in line categories, and there is minimal markdown risk associated with these items. I view this as similar as the graduation category. The timing of the sales were disrupted, but, overall, the category performed very well for us. Consumers are adapting to the current environment, and are still celebrating, albeit in smaller groups or celebrating in different ways. In March, the merchant team took action to make adjustments in Halloween buys and derisk the category, much less focus on traditional trick or treating and large gatherings and more focus on decorations and customs. We are seeing very nice trends regarding the early sales related to Fall Harvest and Halloween. Now regarding Dollar Tree Plus! Our focus on selling great value merchandise at price points of $5 and below, we are continuing to analyze, learn and make adjustments to the program. Earlier this year, we transitioned from the initial consumable-dominated assortment to more of a wild-type discretionary products that Dollar Tree is known for. We recently added bins to our larger test stores to promote some hot, one-time item sales. Sales of these discretionary products remained strong with good sell-through as customers are responding favorably. We are excited about the many new, multi-price discretionary products that we already have on the store shelves for this fall selling season. We remain encouraged about the potential for Dollar Tree Plus!. Inventory levels in both our segments were impacted during the quarter as it relates to higher turned consumable categories. Current environment and related in-stock levels on domestic items are improving, but the continuation of high customer demand, especially on items such as paper towels and cleaning supplies, is still outpacing both vendor production, capacity and the supply. In-stock levels on certain items are constrained, but we do expect to see continued improvement as we move through the quarter. Throughout the quarter, we rewarded our dedicated hourly store and distribution center associates with premium pay. This was in recognition for their extraordinary efforts to protect and serve our customers effectively with enhanced cleaning protocols and other safety measures. We believe these efforts contributed to our solid top line sales performance during the quarter. The value and convenience of our stores' offer is desired in the current environment by customers who are looking to save money while shopping close to home. The COVID-19-related costs incurred for wage premiums for the frontline associates, our guaranteed sales bonuses for field management and the supplies needed for keeping our customers, associates and facilities safe totaled nearly $135 million for the quarter. Surveys indicate that customers want to shop where they feel comfortable and safe. We have invested in our associates and believe this is contributing to enhance loyalty, attendance while reducing turnover in our stores. Over time, lower turnover can lead to improved shopper experience, more efficient store operations and reduced shrink. During the quarter, we went to re-rank Dollar Tree and Family Dollar, first, an aggregate of strongly trusted or somewhat trusted ratings of all retailers, enforcing safety measures for shoppers. Additionally, as many of you have seen in the news reports, more than 100 of our stores were impacted in certain communities during the recent periods of civil unrest. Overall, we incurred nearly $17 million in costs during the quarter related to store damages, repairs and lost inventory. The majority of the impacted stores have been reopened. Regarding our supply chain, we continue to support planned growth and infrastructure and distribution capacity ahead of the need. We recently began shipping from our newest distribution centers in Rosenberg, Texas and Ocala, Florida. These facilities will provide increased capacity and improved efficiencies to support continued profitable store growth in both Southeastern and Southwestern states. We completed more than 250 real estate projects in the quarter, including 131 new stores, 22 relocations, 76 Family Dollar H2 renovations and 26 store closings. We ended the quarter with 15,479 stores. I am very proud of the work our leaders throughout the organization, including our store operations and field leadership teams, our merchandising group, our DC and supply chain teams and our store support center team. I'll toss it over to Kevin now to provide more detail for the Q2 performance.
Kevin Wampler:
Thanks, Mike, and good morning.
For the second quarter, consolidated net sales increased 9.4% to $6.28 billion, comprised of $3.18 billion at Dollar Tree and $3.1 billion at Family Dollar. Enterprise same-store sales increased 7.2%. And on a segment basis, comps for Family Dollar increased 11.6% and for Dollar Tree increased 3.1%. Overall, gross profit increased 16.2% to $1.92 billion. Gross margin improved 180 basis points to 30.5% compared to 28.7% in Q2 of 2019. Gross profit margin for the Dollar Tree segment decreased approximately 10 basis points to 33.7% when compared to the prior year's quarter. Factors impacting the segment's gross margin performance included distribution costs increased 70 basis points, primarily due to higher payroll costs and depreciation. This includes the start-up expenses of the 2 new distribution centers that Mike mentioned as well as approximately $6.7 million or 20 basis points of COVID-related expenses, primarily premium pay bonuses and health screening costs. Shrink increased approximately 15 basis points based on inventory results and an increase in the accrual rate. These cost increases were partially offset by improved merchandise costs, including freight, which improved by approximately 65 basis points. Dollar Tree saw an improvement in merchandise mix, lower freight costs as a percentage of sales and improved markdown, partially offset by an incremental $8.2 million of tariff costs. Occupancy cost decreased 15 basis points due to leverage on the comp sales increase in the quarter. Gross profit margin for the Family Dollar segment improved 390 basis points to 27.2% in the second quarter. The year-over-year improvement was due to the following. Merchandise costs, including freight, improved 190 basis points, primarily due to improved merchandise mix. Discretionary sales, driven by government assistance and improved assortment, comped up 28.9% for the quarter, increasing total discretionary sales to 26.2% of the business from 22.9% last year. And traditionally, the Family Dollar segment had improved mark on and lower freight cost as a percentage of net sales, partially offset by $2.6 million of incremental tariffs. Occupancy costs decreased approximately 95 basis points as a result of leverage from the comp sales increase. Markdown expense improved approximately 85 basis points as we cycled the store optimization markdowns and higher clearance sales from the prior year's quarter and lower promotional activity in the current year, partially offset by $7 million of markdown costs for stores affected by civil unrest. Shrink decreased approximately 40 basis points based on improved inventory results in the current year and an increase in the accrual rate during the prior year. These benefits were partially offset by distribution costs, which increased approximately 25 basis points due to increased payroll costs at the DCs. These costs included approximately $4.7 million or 15 basis points of COVID-related expenses, primarily premium pay bonuses and health screening costs. The consolidated selling, general and administrative expenses increased 50 basis points to 24.5% of net sales compared to 24% in Q2 a year ago. For the second quarter, the SG&A rate for the Dollar Tree segment as a percentage of net sales increased to 24% compared to 22.4% in Q2 of 2019. Payroll costs increased approximately 175 basis points comprised of the following. Payroll expenses increased approximately $66 million or approximately 210 basis points for costs associated with COVID-19 premium pay and bonuses. This increase was partially offset by decreases in workers' compensation and benefit costs as well as leverage from the comp sales increase. Other selling, general and administrative expenses increased approximately 5 basis points. The company incurred COVID costs of $3.5 million or approximately 10 basis points for PPE and cleaning supply. Additionally, general liability claim expense increased based on development, partially offset by lower legal and travel costs. So our facility costs decreased approximately 10 basis points, primarily due to leverage of the stronger same-store sales and a lower electric costs. The SG&A rate for the Family Dollar segment improved approximately 85 basis points to 21.9% compared to 22.7% for the second quarter of 2019. Operating expenses decreased by approximately 90 basis points, primarily due to higher costs in the prior year related to the disposal of fixed assets in connection with the store optimization plan and reduced advertising and travel as a percentage of net sales in the current year as well as leverage from the comparable store sales increase. Store facility costs have improved approximately 25 basis points, primarily from leverage on comp sales and lower electric costs. And depreciation improved 5 basis points, primarily from leverage on the comp sales increase. These benefits were partially offset by payroll expenses, which increased approximately 40 basis points, driven by COVID-19 cost of $48.2 million or 155 basis points for premium payment bonuses, an increase in incentive compensation based on performance. These increases were partially offset by decreases in workers' compensation, benefit costs and temporary health and leverage from comp sales. Operating income increased 39.4% to $374.9 million compared with $268.9 million in the same period last year. And operating income margin improved 130 basis points to 6% compared to last year's second quarter. The current year quarter included $134.9 million in COVID-19-related expenses and $16.8 million in civil unrest costs. Nonoperating expenses totaled $35 million, comprised primarily of net interest expense. Our effective tax rate was 23.1% compared to 21.1% in the prior year second quarter. The company had net income of $261.5 million or $1.10 per diluted share, which included $134.9 million or $0.44 per diluted share of incremental operating costs for COVID-19-related expenses and $16.8 million or $0.05 per diluted share for civil unrest costs. This compared to a net earnings of $180.3 million or $0.76 per share in the prior year's quarter. Combined cash and cash equivalents at quarter end totaled $1.75 billion compared to $539.2 million at the end of fiscal 2019. The company paid down $250 million on its revolver during the quarter. Outstanding debt as of August 1, 2020, was approximately $4.1 billion, which includes $500 million drawn on our revolving line of credit. Inventory for Dollar Tree at quarter end declined 4.2% from the same time last year, while selling square footage increased 4.9%. Inventory per selling square foot decreased 8.7%. The team is actively managing the mix of inventory to build food and essential goods categories. Inventory for Family dollar at quarter end decreased 7% for the same period last year, while selling square footage increased 0.6%. Inventory per selling square foot decreased 7.6%. Our Family Dollar inventory reflects higher-than-normal out of stocks in certain categories. Our merchants, supply chain and vendors continue to work to improve our position to meet increased product demands. Capital expenditures were $232.5 million in the second quarter versus $293.3 million in Q2 of last year. And for fiscal 2020, we continue to expect consolidated capital expenditures to be approximately $1 billion. Depreciation and amortization totaled $168.1 million for Q2 compared to $155.1 million in the second quarter last year. And for fiscal 2020, we expect consolidated depreciation and amortization to range from $675 million to $680 million. While we are not providing sales and EPS guidance, I do want to provide a few data points for your modeling. Net interest expense is expected to be approximately $38 million in Q3 and $152 million for fiscal 2020. The tax rate is expected to be 22.4% for the third quarter and 22.6% for fiscal 2020. And weighted average diluted share counts are soon to be 238.3 million shares for Q3 and 238.1 million shares for the full year. As demonstrated by the significant business trend changes between Q1 and Q2, the environment remains volatile. We have always valued the flexibility of our business model, and we continue to adapt as necessary during these uncertain period. We have a strong balance sheet and continue to grow the company by investing in new and renovated stores, our supply chain and technology to improve the customer experience. We remain confident in our business and our ability to drive long-term shareholder value. I'll now turn the call back over to Mike.
Michael Witynski:
Thanks, Kevin.
I could not be more proud of the overall team's performance for the second quarter. As I stated earlier, it is a new day at Family Dollar. Family Dollar delivered a 13.6% comp for the first half of the year, and operating margin has improved 350 basis points from the first half a year ago. We have seen nice momentum thus far in Q3. Dollar Tree had a good quarter with sequential improvement in both sales and margin, following a very challenging Q1. Aside from the food category, we saw comp improvement in every line of the business in the second quarter. I believe we are at the right spot at the right time. We have a business teams consolidated into one store support center. Our leadership teams are aligned, focused and energized. Our support teams are receiving consistent direction and are acting with enhanced clarity, focus and speed. Our merchant teams are doing a tremendous job of adapting and reacting to evolving customer trends, and our store operators are focused on running great, clean, safe stores. At Dollar Tree and Family Dollar, we have a tremendous opportunity to drive sales, enhance gross margins and leverage our cost structure, each contributing to operating margin improvements over time. We are a growth company in the most attractive sector in retail, opening more stores, renovating stores, improving our efficiencies, generating significant free cash flow, focusing on our customers and running great businesses. I truly believe the best is still ahead of us. Before we go into Q&A, I would like to just share that our thoughts are with all of our families and communities and our associates that have been with and are being impacted by Hurricane Laura that is passing through the Louisiana and Texas area right now. Operator, we are now ready to take questions.
Operator:
[Operator Instructions] We'll take our first question from Matthew Boss with JPMorgan.
Matthew Boss:
Mike, congrats on the new role. Maybe while early, any change in the key areas of focus as we think about Dollar Tree and the Family Dollar banners? And maybe specifically, how are you thinking about multi-price points at Dollar Tree? Where do we stand today? And what key metrics are you looking forward to potentially scale this initiative?
Michael Witynski:
Matt, thanks for your interest. Regarding the multi-price point at Dollar Tree, we are very interested and excited about the opportunity. We're going to -- especially as we moved into the more discretionary and wow factor that Dollar Tree is known for, we're seeing good response from our customers as we provide exciting products for them. And we're going to continue to watch it, not the key metrics that we're watching. We're going to continue to watch, are our customers responding to a favorably? Are we getting more productivity out of that 4-wall box? So we want sales per square foot to go up. And we want to enhance our margins. I mean, those are the 3 things that we'll be looking at to determine if it's successful as we continue to enhance it.
On the Family Dollar side, we will continue. We think that, that 11.7% comp is -- just confirms that our customers are appreciating the investment we're making in our H2. They're responding favorably. And Rick and the merchant teams, too, that 18 months ago, we focused a lot on rolling out the H2. In the last 6 months, with Rick in charge, he's really working on refining that the H2 assortment. As you always have continuous improvement, we're looking at adjacencies, SKU count. How do you expand in discretionary side? So while we're rolling out that H2, the merchants are working on that continuous improvement that will get us more sales per square foot and more margin by getting our discretionary mix stronger.
Matthew Boss:
Great. And then, Kevin, at the Dollar Tree banner, what's the best way to think about the gross margin headwinds versus tailwinds in the back half of the year, maybe relative to the second quarter? And then as we think about the 35% to 36% banner gross margin long term, that I think you are very confident, with any constraints to getting to that level next year, that we should think about?
Kevin Wampler:
Thanks for the question, Matt. I think as we think about it, obviously, we saw things balance out in Q2 a little bit. And again, we saw some nice improvement in our overall margin. Again, discretionary mix grew in Q2 and balanced things back out from where we were in Q1. As we look to the back half of the year, I believe we're set up for a strong discretionary run. I think, as Mike mentioned early on, we're seeing good sales in Fall Harvest and Halloween, which bodes well, and we'll continue to build the categories back up on the food and essential side. But as I look at it in general, I think as we talked about, maybe our biggest headwind as we go to the back half is our distribution costs. We talked about it being up 70 basis points in Q2. And again, what we did have in there is start-up costs for 2 new buildings, which is the first time in a long, long time, many, many years, we've had 2 buildings opening up at the same time. So there are a lot of start-up costs that go into that and add to that.
But again, I think that's where the pressure is. Shrink is -- continue to be a little bit stubborn, but I do believe we can get our arms around that. And -- but -- so I think really, as I look at it, if we can drive some additional sales, create some more leverage, we feel pretty good about the natural product margin side. The commodity side of the business still feel like it's in a pretty good place. Our buyers completed their July trip in a sense from here in the states, but feel good about the way that trip went and how that will affect us as we continue to go forward. So I think that's kind of how I'm thinking about the second half in the Dollar Tree segment.
Michael Witynski:
Matt, just to give a little color, too, on your question, getting to the 35% to 36%. We absolutely believe we can get to that range that we historically have. As Kevin said, we like the mix that can drive us there. And if you really look at our initial markdown from a product and mix perspective, we're in great shape. Our pressure is from the shrink and the DC costs. We know where it is, and we're going to get after those areas.
Operator:
We'll take our next question from Michael Lasser with UBS.
Michael Lasser:
On the Family Dollar side, first, why do you think the spread between Family Dollar and its largest competitor in terms of comps expanded this quarter versus where it had been in the last several quarters? And as part of that, your consumable business was very good that drove gross margin expansion. Are you going to give some of that back? And this is not a realistic gross margin to expect that we should be modeling moving forward?
Michael Witynski:
Michael, thanks for the question. We're very proud of and like our 11.7% comp growth and especially a record 28.9% growth on the discretionary side. We're seeing that on the Family Dollar side, based on the information that we're getting from third parties and internal, that we captured 15% new customers during the quarter. Our discretionary market share gains were 3x what the market was on the discretionary side of the business. And with our 250,000 new sign-ups on our smart coupons, we are getting new customers engaged. So we like our comp sales growth. And all the things that our merchants and the Rick McNeely and the team are focused on are the right things. They're responding. And that focus to sharper price points, basic items and having what customers need when they're in our store, we think, is working.
Michael Lasser:
Okay. And my follow-up is, you provided some comments around what you've been seeing early into the third quarter, which is important because there's still a lot of folks, who are out of work, and you guys provide great value to them, but yet their unemployed insurance has -- or their enhanced benefits have worn out. So you mentioned that Dollar Tree is off to a good start. Is it cool if we assume that, that business has accelerated from where it was last quarter? Just given that you've addressed some of the out of stocks and other issues in that in the consumable categories? And should we also assume that Family Dollar is seeing similar trends to what you reported in July?
Michael Witynski:
Yes. We believe we like the third quarter, and we think the third quarter is starting just like we ended the second quarter. We've got strong comp store sales. We like the mix on both sides of the business. And as Kevin said, early indicators on fall and Halloween are strong, and we think we're well positioned for that. We think, based on what we're seeing from the customer, since they're spending more time at home, they want to decorate their homes and invest in their homes more. So we're seeing those categories. So how -- we may be different, but with them spending more time at home, they're going to decorate that home since they're there. And we're seeing that in our sales.
Operator:
We'll take our next question from John Heinbockel with Guggenheim.
John Heinbockel:
And Mike, let me start with your thoughts on Dollar Tree, right, and the discretionary business over the next, I don't know, 6 to 9 months, right? Because in '08, '09, you did see an acceleration on trading down as the recession took effect. What's your outlook when you think about Dollar Tree in the next couple of quarters? And are the merchants doing anything differently in anticipation of some trading down benefits?
Michael Witynski:
Yes. Thanks, John, for the question. And I think we're well positioned on with our -- everybody is staying at home right now. Our Crafter's Square that are -- that we rolled out the first quarter, the 2,400 stores now and more than 3,000 stores. Our customers are responding very, very well. So our merchants are continuing to rebuy that and fulfill the drive and the demand in that category. And on the consumable side, we see -- every week and each period, we see the replenishment side getting better as vendors start to drive capacity. So we're -- we like the mix of sales going forward, and I think we're going to be in a good position in the back half of the year. And going into next year, especially when the customers are going to need us most, with the unemployment, the extra benefits going away and the unemployment rate where it is, we believe we're in a great position as we were in '08, '09, '10.
John Heinbockel:
All right. And then maybe secondly, you talked about the 2 DCs at Dollar Tree. So maybe a thought on where we are in co-mingling distribution, right, between the 2 banners. And I assume those 2 are going to be Dollar Tree-centric only, but where do we -- are we moving closer to more co-mingling to try to get the distribution cost down? Or is that a ways away?
Michael Witynski:
Yes, that's a great question. As you've seen, our DC costs are outpacing where we want them to be. So part of that is we do have a longer-term strategy to leverage our network. Currently, we are -- we have 1 co-banner DC in our St. George, Utah. But keep in mind, in the last 2, 2.5 years, every DC that we've opened or opening it with systems and the capability of co-bannering just as we have these 2. So we are starting out these 2 because that's where the growth historically has been on the Dollar Tree side, so we've been feeding that growth. But down in the Ocala business and the Texas, they are going to be capable of co-bannering. And in that long-term plan, we will be moving to that.
Operator:
We'll take our next question from Scot Ciccarelli with RBC Capital Markets.
Scot Ciccarelli:
Scot Ciccarelli. Can you provide some more color just regarding some of the supply shortages you highlighted, especially on the Dollar Tree side, and how you think that inventory flow will change as we get kind of further through the back half?
Michael Witynski:
Yes, Scot, thanks. And I would say on both sides, it's -- on the consumables side, it's really anything to do with paper and cleaning. So specifically, paper towels as people continue to enhance their protocols at home or wherever they're at with cleaning, any chemical with a kill claim, any hand sanitizer, there is still a lot of pressure on meeting the needs of the customer. But we do see the bath tissue, for instance, that is starting to improve. And actually, we can have that tissue on the shelf for more than just a couple of days. So I would say, throughout the back half of the year, we will see improvement in our in-stocks and those highly consumable items. But we are -- we have been communicated from vendors that this is a longer term -- there will be pressure on the back half of the year from our manufacturers.
Scot Ciccarelli:
And Mike, do you guys have a -- I'm sorry. I was going to say, do you guys have an estimate for what the potential sales impact was or headwind that you faced during the quarter from these supply shortages?
Michael Witynski:
Yes. No, we -- not at the top of my head, we do not.
Operator:
We'll take our next question from Robby Ohmes with Bank of America.
Robert Ohmes:
Mike, I was hoping you could give a little more color on Dollar Tree and kind of what's going -- what you're seeing there. So the one question would be just the stimulus impact with some things rolling off at the end of the quarter and into this quarter. I know Dollar Tree is a much broader income demographic than Family Dollar. Anything you're seeing in the type of customer and how they're responding? Are you seeing some impacts on the stimulus side with the lower income customers buying less?
And then the other question is just, can you help us, for yourselves and for the industry, think about this big decline. I think you guys said 16% decline in transactions at Dollar Tree. Like how are you guys thinking about the transaction comp playing out in the back half and how should we think about that?
Michael Witynski:
Yes. Thanks for your question, Robby. So in Dollar Tree, we believe that the first half of the quarter in May, as we stated, was supported by the stimulus and the extra benefit dollars out there. But the great news is as those went away and as customers needed value and convenience and safety, they continue to shop at Dollar Tree and at Family Dollar. So we feel good about our comps towards the end of the quarter and going into the third quarter. And from the basket and transaction size, we are still seeing -- they are shopping with a purpose. When they come in, they are shopping and getting definitely driven a higher basket. So we think that will continue as we go into the fall as people continue to practice social distancing in the safety protocols as they should.
Robert Ohmes:
And Mike, as other stores came back online, because you guys obviously were a necessity retailer that's been open, but any changes you've had to make from a marketing standpoint or any pressures you've seen on either Family Dollar or Dollar Tree related to some of these other stores coming back online?
Michael Witynski:
Yes. We have not seen any noticeable difference. As I stated, at Family Dollar, our discretionary business, as customers came over other competitors opened up, we -- the market grew on the discretionary side but Family Dollar grew 3x back. So we're seeing that as competitors are opening up and more stores are opening, we did not see a noticeable difference in our traffic and/or basket.
Operator:
We'll take our next question from Chuck Grom with Gordon Haskett.
Charles Grom:
Mike, congrats on the new position. My question is on Family Dollar. You talked about 15% new customer acquisition, I believe, in the quarter. Just wondering if you could just give us that metric for the first quarter. And then looking ahead, I'm curious what steps you're taking to retain those shoppers and cultivate those relationships over the next few quarters and even into next year.
Michael Witynski:
Yes. Thanks, Chuck. I do not have that number for the first quarter. I think we can grab that, and Randy can get back to you. Regarding what we're doing to retain them is, a, provide a great shopping experience. Now more than ever, all the surveys and what we hear from our own customers is safety, cleanliness and convenience of getting in and out is very important to them, and then provide them what our strategy is on that.
On the consumables side, we want to have the products that are looking for on the shelf. And on the discretionary side, our teams are continuing to work on those sharper price points with great value on basic needs. And we think doing those things and providing that when they're in our store, we'll keep retaining them. And then along with -- we like the increase of 0.25 million people signing up for our smart coupons. We think that we're going to be able to enable us to speak to those customers and watch what they're buying and keep driving basket size with them.
Charles Grom:
That's helpful. And then just bigger picture, like the Dollar Tree guys purchased Family Dollar 4 years ago, it's been a little bit of a struggle over the past few years. Just curious what you think needs to get done, not near term, but just bigger picture to fix the Family dollar business to narrow the gap with Dollar General to improve margins. Just what do you think needs to get done.
Michael Witynski:
I think it's a new day at Family Dollar. And I think the direction that this team is focused on right now, under Rick McNeely and the merchants, they are bringing clarity, focus on the right things, getting the right products. And I think it's evident by retaining more customers and driving an 11.7% comp and a 28.9% comp in our discretionary business. So I think those are the right things.
And I think structurally, in our organization, we are all in one building now under one leader. And I think we've got the right leaders in place that can drive this strategy. So it's not only what is your focus on your strategy, but having the right people in place that can drive and execute that. And I'm more confident than ever that we've got the right team on the merchandising and the operations side to execute what we need. And I also I think as we -- with the 2 companies coming together, the discipline that Dollar Tree has and buying that wow and driving that cost and bringing that value into products, so embedded in our culture, we've also moved some people. So as we look at our structure, we have cross-pollinated some leaders. So we've got a great leader driving our discretionary side of the business that had many, many years of experience in Dollar Tree. So it's a combination of all being in one building, having a great strategy that our customers are responding to and then getting the right people in the chairs to execute the work.
Operator:
We'll take our next question from Paul Trussell with Deutsche Bank.
Paul Trussell:
I wanted to go back to the discussion around EBIT margins. This quarter has -- came with some elevated expenses, right, particularly on the Dollar Tree side related to labor and other issues with the stores. If you are comping in the 3-plus percent range going forward, Kevin, how should we think about the ability to leverage overall expenses in the third quarter and second half? And just thinking about how to think about that go-forward algorithm of the business and ability to really flow down to the bottom line.
Kevin Wampler:
Okay. Thanks, Paul. Yes, I think, obviously, to your point, if you -- obviously, we have invested in our associates around safety and premium pay. And obviously, from the standpoint, we do believe it's made a difference between, as Mike mentioned in his comments, attendance, turnover, various things that we think help us run a better store and hopefully keep people coming back, even though traffic doesn't really show -- it was really pretty stubborn in that 15% negative on the Dollar Tree side. Sans the COVID costs, obviously, operating income would have been up, EBIT would have been up. As we go into Q3, we put an 8-K out a few weeks ago that premium pay would continue for the first 4 weeks of August at a cost of about $18 million. And basically, that's less than it was. So we have lowered what the premium amount is. In our 10-Q that was filed this morning, we noted that, that premium pay will continue additional 4 weeks. And I think realistically, for any modeling, you should assume that it will be in place for the 13 weeks of the quarter of Q3.
Again, we're going to also continue to obviously have expenses like anybody else for PPE and cleaning and sanitizing supplies. So that being said, it will be a headwind. It will be hard for -- I don't necessarily expect that Dollar Tree will show an improvement year-over-year in operating income or EBIT in Q3 because of that. So we've made that decision as a company that it makes all the sense in the world to reward these frontline workers and go through that. Now it will not last forever. And so these costs at some time -- at some point in time, will fall away. As we get into next year, you can expect these costs, I would think, to fall away to a certain degree, maybe not 100% because I'm sure we're going to still have cleaning protocols and various things. But because of that, that will be the headwind. I think if you look at the other operating lines, I mean, I think SG&A has been well controlled, otherwise. I think we're on the right track with getting our gross profit back to levels that we believe are where we should be and driving that back to that 35% to 36% range. So I think long term, the prognosis is very, very good. But obviously, we have these one-time costs currently. And realistically, what we don't know, another thing that's going to happen in Q3, I would expect there's going to be costs related to the hurricane at the end of the day that we can't put our arms around today. But obviously, we have many stores in the path of that storm, and I would expect that there'll be some damage and some dollars that will affect Q3 as well that we can't speak to beyond the fact that there'll be some when we report in November.
Paul Trussell:
And just wanted to also ask about your cash priorities and thought process. You do have an elevated amount of cash on the balance sheet today versus usual levels this time of the year, although some of that is related to what's drawn on the revolver. Just help us think about how are you thinking about leverage, store openings and remodels and share repurchases, which I think has been about a year since you've been engaged in that.
Kevin Wampler:
Yes. So obviously, to your point, we did preemptively draw on the revolver in Q1 with the uncertainty of the pandemic. We've paid back $250 million of that $750 million draw. So at some point in time, we'll pay that $500 million back as well. The other thing we have due February 1, 2021, the $300 million legacy Family Dollar notes come due. So the plan would be to extinguish those notes at that point in time. That being said, we'll still have a nice cash position even with that. Obviously, we always want to support growth, and we continue to grow through new stores, renovations, supply chain technologies I spoke to. So those things will continue. We do have a share repurchase plan authorization out there. We have $800 million authorized and outstanding as we sit here. Obviously, we kind of put the brakes on that with the pandemic, but as things settle. Again, there's obviously some uncertainty as we go to the back half. Will there be a rebound in the pandemic as we get into the fall and the flu season that comes with winter? So we'll keep our eye on those type of things and make some decisions as we enter the new year.
Operator:
We'll take our next question from Kelly Bania with BMO Capital.
Kelly Bania:
I wanted to just go back a little bit to H2 remodels. It sounds like from a top line perspective, they continue to perform well. Wondering if you can expand a little bit more on the margin performance you're seeing there relative to the other stores. And is there any opportunity to kind of reaccelerate the remodels there? Or is there any logistical headwinds in accelerating that? Maybe you can just touch on that a little bit.
Michael Witynski:
Yes. Kelly, thanks. I'll throw it to Kevin for the margin. But from a perspective of accelerating, so we're trying to do as many as we can given the current environment of travel restrictions and COVID restrictions in the state. So we've -- we're going to do 750. But absolutely, as soon as the states open up in the locations, and it's safe and we can get our third parties and our teams in there to do the remodels, we will absolutely open that back up and accelerate that.
Kevin Wampler:
Speaking to the margins, obviously, as you look at the H2 model, there's some various components, right? So you have additional freezers and coolers, which is lower margin goods. More impulse/media consumption, which is a little bit higher margin. And then, obviously, an emphasis on seasonal. One of the things Mike spoke to earlier was the fact Rick and team really looking and continuing to improve that overall model, looking at the space we dedicated to discretionary. And how do we provide a probably even better discretionary assortment and relevant assortment within that box? But we like overall -- obviously, we'll get a nice sales lift. We get a nice overall driving more profit dollars at the end of the day. And then, obviously, it is our intention to drive a higher overall rate of profitability out of those stores. And we obviously are seeing that, but we think there's even more we can do with it.
Operator:
We'll take our last question from Karen Short with Barclays.
Karen Short:
Just a couple of questions on COVID cost. So you did call out that $18 million that will continue -- that we should assume continues for the whole quarter. Wondering if that also applies to the $4.5 million in manager bonuses. Should we assume that that's in place for the quarter? And then wondering if you could give the split between the Dollar Tree and the Family Dollar banner on those 2 components. And then I had one other follow-up.
Michael Witynski:
Okay. From an overall standpoint, from a banner perspective, the Dollar Tree segment incurred $76.6 million in Q2 and Family Dollar incurred $57.1 million, and, again, the vast majority of that being payroll costs at the end. And between -- and mainly stores, but obviously, there's a component there of DCs, which we broke out within the detail we gave you earlier today. So you have that piece of it. As far as the $4.5 million of manager bonuses, that does not continue necessarily directly. Those were above and beyond. And as we go forward, that does -- will probably not take place. But again, it's a very fluid situation. And so it's always open for change. But at this point, we do not expect that to necessarily continue.
Karen Short:
But take the $18 million and allocate it the same way between the $76 million and the $57.1 million that we saw throughout the quarter.
Michael Witynski:
Yes. I think that's reasonable because what you have to remember is we just -- we have an hour -- a larger hourly workforce population in the Dollar Tree banner than the Family Dollar banner.
Karen Short:
Great. Okay. And then, I guess, I'm still not totally clear what the message would be on the takeaway on Family Dollar comps in the current quarter. I know you said it's still solid. So should we assume that they are continuing at the level that we saw for the entire quarter in 2Q or too soon to tell? Or -- I mean, just curious if you can be a little more clear on that.
Michael Witynski:
Well, I think, Karen, as you think about it. So I think within the prepared remarks, we spoke a little bit about the cadence of comps for Family Dollar and the fact that the lowest quarter -- or excuse me, the lowest month within the quarter was roughly 8.5%. And the easiest way to think about it is there's been little degradation from that trend coming out of July.
Operator:
This concludes today's question-and-answer session. I would now like to turn the call back over to Randy Guiler for closing remarks.
Randy Guiler:
Thank you, and thank you for joining us on today's call and especially for your continued interest in Dollar Tree and Family Dollar. Our next quarterly earnings conference call to discuss Q3 performance is tentatively scheduled for Tuesday, November 24, 2020. Thank you, and have a good day.
Operator:
This concludes today's call. Thank you for your participation. You may now disconnect.
Operator:
Good day, and welcome to the Dollar Tree, Inc.'s First 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, VP, Investor Relations. Please go ahead, sir.
Randy Guiler:
Thank you, Shannon. Good morning, and welcome to our call to discuss Dollar Tree's performance for the first quarter of 2020. On today's call will be CEO, Gary Philbin; Enterprise President, Mike Witynski; and CFO, Kevin Wampler.
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 annual report, 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. [Operator Instructions] Now I will turn the call over to Gary Philbin, Dollar Tree's Chief Executive Officer.
Gary Philbin:
Thank you, Randy. Good morning, everyone. First, from all of us, our report today is against the backdrop of the COVID-19 impact across our country. Our hearts go on to all those affected. Today's Q1 report reflects a number of accomplishments and [ comments ] during a quarter that was impacted, unlike any other, due to the effect of COVID-19.
First, our results around the core businesses of both business speaks to the resiliency and strength of both Family Dollar and Dollar Tree in the communities we serve. The investments we have made in our Family Dollar business in our H2 stores and assortment have been highlighted during this critical time. Second, we took quick action to protect individuals with enhanced cleaning protocols to keep the facilities clean and sanitized. We encourage social distancing guidelines as recommended by the CDC and provided PPE supplies, including masks and gloves. Additionally, we have installed more than 60,000 plexiglass shields in store checkouts. Third, our efforts to get the right products to the distribution centers and stores have been the key priority for merchants across both banners. We worked closely with vendor partners to support and streamline shipments of needed essentials. And finally, all of this could not be accomplished without the leadership of our teams across 48 states and 5 Canadian provinces. Their efforts have been remarkable, and it is humbling to see the dedication they have with their teams and for their communities. I could not be more proud of all these and the many other accomplishments against the COVID-19 crisis that's impacted our country and company. Family Dollar's comp of 15.5% reflected the initial impact of household stocking up on basic goods in March related to the disease. The consumable side of the business delivered a 17-plus comp, and was strong throughout the quarter. On the discretionary side, comps were positive up to Easter. And then we saw an acceleration through the end of the quarter around the home and other discretionary categories, resulting in a discretionary comp of just under 9% for Q1. Operating income for Q1 improved 230 basis points. But despite the impact of selling record volumes of lower-margin consumables and incurring the additional costs related to COVID-19, Dollar Tree's comp decreased 90 basis points, driven by the impact on Easter selling and our party business in general, from the executive orders for shelter-in-place mandates. The combined impact of the party, Candy and Easter categories negatively affected Dollar Tree's overall comp by 490 basis points. Following Easter, discretionary comps were nearly flat for the remainder of the quarter. Operating margin was 9.2%, reflecting a negative top line comp and a heavier consumable mix along with COVID costs. All COVID costs related -- all related COVID costs incurred for our wage premiums and for front-line associates, guaranteed sales bonuses for field management and supplies for keeping our facility safe totaled just over $73 million. Now I'll turn the call over to Mike.
Michael Witynski:
Thank you, Gary, and good morning. Before I get into the details regarding our Q1 performance, I want to share a little bit about the associates and their remarkable work and dedication. I want to thank our teams for all they've accomplished each and every day for the last 9 weeks. Our entire leadership team is inspired and very much appreciative of their individual commitments and their collective team efforts across Dollar Tree and Family dollar. In our stores, in our DCs and in our store support center, I am very proud of the dedication of our associates.
Regarding Dollar Tree's response to COVID-19, our company took aggressive and decisive actions early on to protect our teams and our shoppers. In early March, we activated our business response team led by risk management and human resources with representation from each functional area in the company. The group worked around the clock to assess the situation, develop policies and procedures and take action where necessary. I would like to recognize the leadership and efforts of our business response team to support our front-line workers.
Steps we've taken to provide clean and safe environments include:
our store associates are practicing social distancing as recommended by the CDC, and we continue to ask that customers also follow these guide items. We dedicated the first hour each morning to serve at-risk customers. We continue to provide store teams with hand sanitizer and cleaning supplies, for high-frequency enhanced cleaning protocols. We closed stores at 8PM to provide associates adequate time for cleaning the store and restocking shelves with essential high-demand products. We supply personal protective equipment, including nonmedical face masks and gloves for associates to wear during their shifts. We have implemented associate health screenings to ensure that we are minimizing the potential for exposure. We've installed plexiglass guards at the check lane in all stores to assist in protecting shoppers and our cashiers.
Stores are now equipped with contactless payment through tap-to-pay with Visa, MasterCard, Apple Pay and Google Pay. We are committed to meeting or exceeding all relevant local and state requirements. By taking these steps, we have been able to keep all stores open as an essential business. Also in March, we announced our plans to hire 25,000 new associates, a target which we have exceeded. Our stores play a valuable role in the communities we serve, and we are dedicated to both serving customers and being an employee of choice, especially in this critical time of need. Now to our first quarter performance. Sales grew 8.2% to $6.2 billion. Consolidated same-store sales increased 7% and we delivered an EPS of $1.04. For the Dollar Tree segment, our 90 basis point decline in sales was materially impacted by weakness in party, Candy and Easter seasonal categories. We were well prepared for the Easter season with products in stores and set during February, following our strong valentine season. As stated in our March 31 business update, Dollar Tree had a 7.1% comp increase for the first 8 weeks of Q1, but was beginning to see a material drop off due to traffic and the initial shelter-in-place as we approached Easter. In March, seemingly overnight, there was a hyper focus on stocking up consumables at concern spread, schools, shared services, weddings and parties were canceled and widespread stay-at-home orders were mandated. We saw a material decline in demand for many of the seasonal and discretionary products related to celebrations and large gatherings. As Gary mentioned, the combination of party category and Easter seasonal product negatively impacted Dollar Tree's Q1 comps by approximately 490 basis points. For the quarter, the consumables delivered a positive 9% comp and the discretionary side of the business was down nearly 9%. Prior to the slowdown, our Valentine seasonal category comped over 4% with a strong sell-through. Categories that performed well, included household consumables, food, personal care and crafts. We continue to see great traction in our stores with the new Crafter Square program. We added the Crafter Square assortment to more than 2,400 Dollar Tree stores in quarter 1. Our customers are responding to the new offerings and the great values.
For the quarter, Dollar Tree's comp transaction count was down 11.7%, while comp average ticket increased 12.2%. As consumers in general have been shopping less, but buy more, a trend that has been seen across retail. Interesting, our consumables versus the discretionary mix. Through Easter, it was 55% consumables. For the period following Easter through quarter end, there was 50-50 balance. And for the first 4 weeks of Q2, we've seen a shift to 55% discretionary. Regarding Family Dollar segment sales highlights for the first quarter include:
the team delivered a 15.5% same-store sales increase on top of a 1.9% comp and Q1 a year ago.
This was comprised of a 17.1% increase in average ticket, partially offset by a 1.4% decline in transaction comp. The sales strength was broad across the geography, each zone delivering a comp increase of 13% to 19%. Regarding cadence of comps in the quarter, February was slightly positive. We had an extremely strong March with customers stocking up on consumables. As provided in our business update, the Family Dollar comp was 14.4%. Through the first 8 weeks of the quarter, the team delivered great results in April with strength in many of our discretionary categories. The consumable side of the business delivered a 17-plus-percent comp, and discretionary comp was just under 9%. We continue to be very pleased with the performance of our H2 stores, with comps continue to outperform the chain average by 10-plus percent. Regarding real estate for the enterprise during the quarter, we completed more than 350 projects, including 99 new stores, 21 new locations, 220 Family Dollar H2 renovations early in the quarter and then 14 store closings, primarily at the end of lease term. We ended the quarter with 15,370 stores. I'm very proud of our leaders throughout the organization, including our store and field leadership teams, our merchant teams, our distribution center and supply chain teams and our store support center team. I will now turn it to Kevin to provide more detail on our first quarter performance.
Kevin Wampler:
Thank you, Mike, and good morning. Consolidated net sales for the first quarter increased 8.2% to $6.29 billion, comprised of $3.21 billion of Family Dollar and $3.08 billion of Dollar Tree. Enterprise same-store sales increased 7%, and on a segment basis, comps from Family Dollar increased 15.5% and Dollar Tree decreased 0.9%. Overall gross profit increased 3.9% to $1.79 billion, gross margin of 28.5% compared to 29.7% in Q1 2019. Gross profit margin for the Dollar Tree segment decreased to 31.9% compared to 34.5% in the prior year's quarter.
Factors impacting the segment's gross margin performance for the quarter, including merchandise costs, including freight, increased approximately 140 basis points. Dollar Tree saw a 4.2% shift in mix to lower margin consumables from higher-margin discretionary merchandise related to the soft Easter selling season and pandemic demand. Higher costs from the impact of an incremental $18 million of tariff costs and higher freight costs were partially offset by improved markup. Markdown costs increased approximately 40 basis points, resulting from increased seasonal markdowns to the lower Easter sell-through. Distribution costs increased approximately 30 basis points, primarily due to higher payroll costs and depreciation. DT payroll costs included approximately $3.5 million or 10 basis points of hourly premium pay for all hourly DT associates for hours worked since March 8 and guaranteed sales bonuses.
Occupancy costs increased approximately 30 basis points due to loss of leverage on the comp sales decrease in the quarter and shrink increased approximately 25 basis points based on unfavorable inventory results and an increase accrual rate. Gross profit margin for the Dollar Tree segment improved 60 basis points to 25.4% during the first quarter. The year-over-year improvement was due to the following:
Occupancy costs decreased approximately 105 basis points as a result of leverage from the comp sales increase and the increased expense in the prior year related to the acceleration of amortization of right-of-use assets from store closures. And shrink decreased approximately 30 basis points resulting from an increase to the accrual rate in the prior year quarter and improved inventory results in the current year. These benefits were partially offset by merchandise costs, including freight that increased approximately 55 basis points, primarily due to a 1.6% mix shift to lower margin consumable merchandise as a result of pandemic demand and higher freight costs, partially offset then through initial markdown. And distribution costs increased approximately 15 basis points due to increased payroll costs at the DT. These costs include approximately $2.7 million or 10 basis points related to the hourly premium pay for all hourly DC associates for all always worked since March 8 and guaranteed sales bonuses.
Consolidated selling, general and administrative expenses improved 40 basis points to 22.7% of net sales. For the first quarter, the SG&A rate for the Dollar Tree segment as a percentage of net sales increased to 22.7% compared to 21.2% in Q1 of 2019. The increase was primarily due to approximately 145 basis points in payroll costs comprised of the following:
Store hourly payroll increased approximately 120 basis points due to the store hourly premium paid to all hourly associates beginning March 8. The premium paid totaled $30 million for the quarter. Field management payroll increased approximately 15 basis points due to loss of leverage from the decrease in comparable store net sales and $800,000 of guaranteed bonuses paid.
Store sales bonus expense increased approximately 10 basis points as a result of $2.7 million of guaranteed fund payout. Store supply costs increased approximately 10 basis points from the result of the installation of plexiglass guards and an incremental cost for PPE. Inventory service expense decreased approximately 10 basis points due to the postponement of inventories from March 15 through the end of the quarter. The SG&A rate for the Family Dollar segment improved approximately 170 basis points to 19.9% compared to 21.6% for the first quarter of 2019. The improvement was primarily due to the leverage on stronger same-store sales. Payroll expenses improved 65 basis points, driven by leverage from the strong comp. Store hourly premium pay totaled $22.3 million and guaranteed bonuses totaled $1.6 million. Occupancy costs improved 55 basis points. Operating expenses decreased by approximately 40 basis points, resulting primarily from reduced advertising and travel as a percentage of sales, and depreciation and amortization expense decreased approximately 10 basis points. Additionally, corporate and support shared service expense as a percentage of sales improved 20 basis points, primarily related to leverage on stronger sales in the current year and cycling store support center consolidation costs from the prior year. Operating income was $365.9 million compared with $385 million from the same period last year, and operating income margin was 5.8% compared to 6.6% in last year's quarter. The current year's quarter included $73.2 million in COVID-19-related expenses. Nonoperating expenses totaled $40.7 million, comprised primarily of net interest expense and our effective tax rate was 23.9% compared to 22.1% in the prior year's first quarter. The company had net income of $247.6 million or $1.04 per diluted share, which included $73.2 million or $0.23 per diluted share of incremental operating costs for COVID-19-related expenses. This compares to net earnings of $267.9 million or $1.12 per share in the prior year quarter. Combined cash and cash equivalents at quarter end totaled $1.76 billion compared to $539.2 million at the end of fiscal 2019. Outstanding debt as of May 2, 2020, was approximately $4.3 billion, which included $750 million drawn on our revolving line of credit. Inventory for Dollar Tree at quarter end increased 4% from the same time last year, while selling square footage increased 7.2%. Inventory per selling square foot decreased 3%. The team is actively managing the mix of inventory to rebuild essential goods while controlling categories such as party saw a decrease in demand in the first quarter. Inventory for Family Dollar at quarter end decreased 10.6% from the same period last year, while selling square foot decreased 3.9% based on store closures in the prior year. Inventory per selling square foot decreased 7%. Our Family Dollar inventory reflects higher than normal out-of-stock in certain categories. Our merchants, supply chain and vendors are working diligently to improve our positions to meet increased product demand going forward. Capital expenditures were $235.8 million in the first quarter versus $209.2 million in Q1 last year. For fiscal 2020, we're now planning for consolidated capital expenditures to be approximately $1 billion compared to our original guidance of $1.2 billion. Changes to our capital expenditure plan, we now expect to open 500 new stores compared to our original plan of 550. These will be comprised of 325 Dollar Tree and 175 Family Dollar, which includes a reduction of 25 planned stores for each banner. Due to the COVID-19-related suspension of our H2 renovation program, we are now planning 750 Family Dollar H2 for fiscal 2020 compared to our original plan of 1,250. Additionally, we've seen a reduction in our capital mix for supply chain based on finalization of projects for the year. Depreciation and amortization totaled $165.5 million for Q1 compared to $151.2 million in the first quarter last year. For fiscal 2020, we now expect consolidated depreciation and amortization to range from $670 million to $680 million. While we are not providing sales and EPS guidance, I do want to provide a few data points for your modeling. Net interest expense is expected to be approximately $39 million in Q2 and $160 million for fiscal 2020. The tax rate is expected to be 23.2% for the second quarter and 22.7% for fiscal 2020. Weighted average diluted share counts are seemed to be 238 million shares for Q2 and 237.9 million shares for the full year. As reported in our March business update, the company withdrew our prior Q1 and fiscal year guidance. Due to the continuing uncertainties, we have limited visibility to our future business trends, which results in a wide range of potential outcomes for our 2020 financial performance. We're in a strong financial position and remain confident in our business and ability to drive long-term shareholder value. I will now turn the call back over to Gary.
Gary Philbin:
Thank you, Kevin. The current macro environment was obviously not contemplated in painting our business for fiscal 2020. Our performance in Q1 validates that Dollar Tree and Family Dollar are important of shoppers in times of need, especially for their daily essentials. With more than 38 million Americans filing unemployment claims in just the past 9 weeks, we believe families need value and convenience more now than ever before. We have a resilient business model, a very strong balance sheet, an experienced leadership team and tremendous opportunity to continue serving customers with those values and conveniences they seek. I cannot say enough about our store and distribution center teams. They have been up to the challenge in being nimble and agile in a quick changing work environment and committed to running the business through an unprecedented time. To recognize our efforts, we have rewarded our hourly store in DC, incented with wage premiums going back to March 8. This investment in our front-line associates has totaled approximately $95 million to this point, $63 million incurred in the first quarter.
We were also pleased to welcome more than 25,000 new associates to the organization during the quarter. Q1 is in the books. We finished the quarter strong. The momentum has carried into our second quarter. While we are still less than 4 weeks into the quarter, I am pleased to say that business is as good at this point. At Dollar Tree, we have seen an improvement on the discretionary side of the business. In fact, with the exception of party pay-for-all, discretionary categories are comping positive in Q2. Categories performing well include crafts, kitchenware, lawn and garden, hardware, toys. They're all performing well. We had a strong Mother's Day and school graduation sales. Crafters Square, like Mike discussed, continued to gain momentum and is now available in more than 3,000 Dollar Tree stores. In the balloon business, which was hindered in 2019 by the Helium shortage, has bounced back nicely. The comp performance at this early stage in the quarter has returned to a level we are accustomed to seeing from Dollar Tree. At Family Dollar, we believe the current environment with family staying close to home is provide us an opportunity to showcase improvements we have been working very hard on in recent years. Our investment in the Family Dollar store base with our H2 renovations has been a key driver since we accelerated our renovations a year ago. Now with customers and communities needing us more than ever, we are being introduced into a format that has a better shopping experience when they need it most. I'm also pleased with the work of the merchant team and the traction we are seeing on the discretionary side of the business. Our customers have moved from all things essential to more purchases to support their at-home and outdoor living. Discretionary momentum that we saw late in Q1 had certainly continued into the second quarter as well. Q2 is off to a very good start in Family Dollar. That said, we do expect this to continue to be an extremely volatile consumer environment. Factors impacting retail will continue to be evolution of the macroeconomic factors, including unemployment rates, variability in vendor supply chains being able to meet product demands, volatility in consumer demand related to the crisis, the value and timing of government stimulus, the duration degree and geographic breadth of bearing shelter-in-place mandates, the evolving competitive landscape across retail and restaurants and our incremental costs related to managing the business during the COVID crisis. We continue to focus on making meaningful progress to grow and improve our business for both brands. We believe we are well positioned in the most attractive sector of retail to deliver continued growth and increase value for our shareholders. The combination of more than 15,300 Dollar Tree and Family Dollar stores provides us the opportunity to serve more customers in all types of markets. Operator, we're now ready to take questions.
Operator:
[Operator Instructions] We'll take our first question from Edward Kelly of Wells Fargo.
Edward Kelly:
I wanted to ask you about the comp cadence. Could you talk a little bit more about the trends that you saw in April, both leading up in the Easter and then after Easter. And then what we have seen so far each banner? And then you provided some qualitative commentary. I'm curious if you could provide some more specific color on May and what you have seen to date from a comp perspective.
Gary Philbin:
Ed, this is Gary. Let me characterize it this way. Obviously, on the Dollar Tree side, Easter was the first week of April. So we really saw the impact of shelter-in-place mandates going in, traffic dropped and Easter was not on anyone's mind going into the holiday. So the bigger seasonal impact to Dollar Tree was the Easter holiday basically evaporating. But post Easter, traffic were negative, moderated, and maybe more importantly, what we saw people buying also changed, too, from the hoarding of essentials, move to some of the other elements of what people were buying around stay at home, which meant children are were out of school, so more stationary, more back-to-school, toys for kids.
And Family Dollar was maybe slightly a little different, not as big of a holiday effort at -- for Easter at Family Dollar and at least around pure Easter. But the things that get impacted at Family Dollar are things like people grill out, it's a family celebration, it's apparel. But I would describe it the same way. Post Easter holiday, we saw folks get back into buying more of what they needed around home living and outdoor celebration, I would call it. And with more folks at home, obviously, we're experiencing the essentials spiking of both banners. So as we go into May, while we see some traffic down, we see baskets go up and we see the breadth of what folks are buying being expanded beyond -- clearly beyond the essentials. So we like what we see going into end of April, and it's carrying on into May.
Edward Kelly:
All right. And then maybe just a follow-up from the margin perspective, particularly around the core Dollar Tree business. This has been a 35%, 36% gross margin business for a very long time. You've had some headwinds recently. A lot of it seems like it could just be transitory. Is there any reason to think you can get back to that range? And can you get back there soon, meaning Q2, Q3 at some point this year.
Gary Philbin:
Well, I don't have a crystal ball that says what's going to happen exactly to the macro environment. There's no reason Dollar Tree can't get back to 35% and 36% with what we see on how we're selling our assortment. Even now, I like how the mix is occurring at Dollar Tree. The impacts that we're experiencing from COVID, everything on the supply chain. And it's everything, from how we need the DCs to run on the priorities of getting key vendors into the DCs and out to stores, we're spending extra on. When we are buying low-value essential, big Q low-value that impacts the cost of the freight coming in and out of our margin as well, and obviously, we think the current wage premiums. Long term, there's no reason. I don't know that I see it in Q2 or in the back half of the year, I dare make a guess on how the retail environment will be. But what we're buying in the value for Dollar Tree is as great as ever. Mike called out Craft. I mean here's a category that really didn't even live in Dollar Tree last year to any extent. And our customers have welcomed it wildly in the stores that we put it in, and that's the nature of Dollar Tree. We find something, we build it. You're on the new thing, and that's really the underpinning to what's going to drive margin. The thing that we've got to handle on the expense side, I've always said, given enough time, we'll scurry around the rocks, but the key to Dollar Tree's magic is keeping the magic of incredible value in front of our customer on the product we're selling.
Operator:
Our next question will come from Chandni Luthra of Goldman Sachs.
Chandni Luthra:
This is Chandni on behalf of Kate McShane. Could you guys talk a little bit more about stimulus in terms of sort of when did trends start to improve for you post Easter, like has that continued? Because we're only starting to hear -- we are also hearing from some customers, anecdotally that some customers are only getting payments right now. So could you talk about how you're seeing stimulus impact the business?
And then is there a parallel to be drawn with tax refunds? We heard 1 retailer talk about it. So do you see that kind of a tailwind in terms of duration, similars versus tax refunds?
Gary Philbin:
Chandni, we're getting a lot of echo on your first question. Was it around how we're seeing customers with the stimulus check?
Chandni Luthra:
Yes, that is correct. So basically, my question is, is there a parallel between stimulus checks and tax refunds?
Michael Witynski:
Yes. So yes, we are seeing some impact as the stimulus gets released into the market and the tax refunds, especially on the Family Dollar side. And as Gary described, we saw some nice momentum in our discretionary side of the business with our home and drilling and coal. So we can see a correlation of the stimulus dollars being released and an increase in our basket size.
Chandni Luthra:
Got it. And then if I could get a follow-up. I'm sorry, go ahead.
Kevin Wampler:
Yes. We were just wondering what your follow-up -- your second question was?
Chandni Luthra:
Yes. So in terms of your global supply chain, in light of the disruption this year we've seen and then with tariffs last year, are there any efforts to kind of realign sourcing globally?
Gary Philbin:
Well, this ripple effect of the COVID impact, obviously, it started in Asia and then has moved into the U.S. side. And so initially, when we saw the disruption in Asia. Parallel was just the short-term effect of factories shutting down right after Chinese New Year. I would say that rebounded fairly quickly to the point that other than being measured a few weeks late on some shipments. That was something that moderated and now is not an issue for us. On the domestic side, however, the spike in demand on domestic essentials. It is something that all retailers are chasing and it varies by vendor, it varies by geography and anything that's related to cleaning, toilet paper, paper towels. While they're all getting better and we're selling record amounts, it's still something that we're probably going to be chasing, I think, into June, and I would guess maybe July with some vendors. But it's getting better week by week, and we see it in our sales.
But it's almost shifted more to the discretionary side now. Some of the things that folks are buying are imports. We're having to go back and take a look at orders on inbound and up those. So it's been a changing shift in dynamic from when it got started, if go all the way back to the impact to China. On supply chain, U.S. domestically and now what people are buying. And so I think about it almost in those 3 stages, how we're running our business and where the priorities are.
Operator:
And our next question will come from Michael Montani of Evercore.
Michael Montani:
I just had 2 questions. The first was on the tariff front. I think initially, there was discussion of around $45 million plus of impact in the first half of this year. So I wanted to see if $20 million to $25 million is probably about right for 2Q.
And then on the COVID expense side, you called out some of the initial labor costs to expect into 2Q. I was hoping to understand if there's additional kind of PP&E safety equipment run rate that we should be factoring in here and how normal and ongoing that would be?
Kevin Wampler:
Sure. Michael, it's Kevin. As it relates to the tariffs. Again, to your point, we -- at the beginning of the year, we stated the fact that tariffs were an incremental $47 million this year, primarily on the Dollar Tree side. And again, part of it is annualization of List 3 at 25% and then obviously List 4 as well. And as we called out $25 million at that point in time at the beginning of the year, we said $25 million in Q1. It's actually annualized. It came in about $23 million, $18 million at Dollar Tree and $5 million at Family Dollar. So we look at Q2, again, we do expect roughly -- I think it's a little less than what we probably initially expected. We really expected it to be around $20 million. I think it may be closer to $15 million. Part of that is just due to some timing as we continue to work with supply chain and what comes in when. But I do believe it'll be about $15 million roughly in Q2. As it relates to COVID and the costs there, again, obviously, we did have significant cost in Q1 as we ramped up PPE supplies. Again, we also did, as Gary mentioned, 60,000 plexiglass shields in our stores, which is probably a bigger cost than the supplies, at the end of the day, to put those in place in a very rapid order. As we go forward, we are expecting, again, to incur additional supply costs as we continue to make sure that our stores have the PPE. They need masks, gloves accordingly as to keep them safe and as mandated in many areas. As well as additional cleaning supplies and sanitizers in our stores, additional cleaners to -- for the enhanced cleaning protocols we have on a daily basis in our stores. Again, it's hard to predict what it will be for Q2, but it will continue forward. And again, that's one of those unknowns and one of the reasons why we really can't give guidance going forward.
Gary Philbin:
Michael, I would just add, the biggest -- lion's share of that once you get past these initial expenses is, obviously, the wage premium. Our folks are on a biweekly pay cycle in advance of each one. We give them our announcement that it's continued. Right now, we are out to mid-June with our associates on wage premium, so they can plan around that, too. So that's where we are right now.
Operator:
Our next question will come from Paul Trussell of Deutsche Bank.
Paul Trussell:
Good execution in a volatile and challenging marketplace. First question is on Family Dollar. Maybe just touch a bit more detail on what you're seeing there. Should we think that 2Q is more or less in line with 1Q results?
Also, what's the feedback been from customers as they return to the format potentially, for some, for the first time in a few years and how you plan to keep those customers there? Also, just curious on any updates on the H2 front and how you feel about your inventory and overall merchandise assortment, especially on the discretionary side, which we were planning to kind of change over this year.
Gary Philbin:
Well, let me start and have Mike chime in on some of the -- what we've seen on the categories. I think Family Dollar has responded maybe even better than we might have thought going into what we didn't know what was ahead of us and our customers came in and shopped the store hard because it's -- when you think about it, its convenience, its value. And with the early and quick work we did. I think we also got addressed for being a safe place to shop with all of our protocols in store, and I think we are recognized for that, with some of our internal measurements that we saw. I think we also saw more folks sign up for our Family Dollar app, which was a pretty good signal that we're gaining some new folks for the first time into the store. So I think early on, we got -- folks needed us. I think it has moved to some recognition on even some of the early work we've done on assortment in having in-stocks.
Now I would tell you, our supply chain. We're pretty capable on supply chain around the world, but we are stressed on the domestic supply chain, like what the broader folk [ think ] are essentials. And we send the essentials to stores every week. They used to last about 2 hours. I would tell you now, it's probably lasting between 1.5 day to 4 days depending on who's getting what amounts. But as much as anything, it's done. Maybe our folks have risen to the occasion in their neighborhoods and communities. And we can -- when I just see the amount of thank yous that come into our stores, it's anecdotal, but I can only tell you folks that really count on the Family Dollar banner during this time. I think what's interesting are some of the category sells. I'll let Mike give you some color on that.
Michael Witynski:
Yes. Gary described in his comments, at first, with the huge demand for those first 3 weeks, it was very weighted heavily towards the consumables side and the cleaning products and paper products. And post Easter, it shifted to at-home, our apparel business is very strong, soft home housewares, home decor, toys and hardware. And the good news is you asked about our inventory position going into the year, we were very strong in inventory position on those categories. So we are able to maintain this good in-stock position for the back half of the first quarter. And now we're -- as Gary is saying, the good news is we're replenishing those sales.
And as you heard from me on March 4, talk about at Family Dollar, those were the categories that we're going to work really hard on to turn around our discretionary business, with basic products, with sharper price points and trying to get it into our stores in our sets and our H2 and that's what we're replenishing with now. So we sold through our inventory. What we're buying now and the changes of our replenishment. And as you heard from Gary, it is selling just as fast as we are bringing it in. So the good news is we're chasing that product and it's turning fast. And the product that we are buying now with our new disciplines is turning into customers are reacting to it. I would say one other piece of the pie that we didn't plan on, but it's starting to show up is in the closeout business. We believe there's going to be a lot of value at Family Dollar and Dollar Tree for closeouts going into the next several months.
Gary Philbin:
And if I -- Paul, you asked about H2. And obviously, hard to look at March in the pandemic effect. But I would say this as we got post Easter, that H2 has continued to have a tad lift even during this time. And it's interesting that as you get into the April time frame post Easter, our rural H2, where we have most of them, outpace the urban locations. And that's not entirely surprising when you think about some of the hotspots affected the urban locations more than rural. So we're still pleased with the H2, I think, just in time. I think back to 2008, it's a different crisis, but that's about the time Dollar Tree was getting to our prototype the way we wanted it. I don't think that's dissimilar to the 1,500 H2 that we have out there that are helping us drive the business now.
Paul Trussell:
That's really helpful color. My follow-up is just to get any other comments that you can provide as it relates to guidance. I know that you're not giving anything specifically, but anything else that we should keep in mind as it relates to 2Q for the balance of the year on some of the items you've mentioned were impacted in the first quarter, things like the merchandise costs, sort of markdowns and other pressures.
Kevin Wampler:
Yes. Paul, it's Kevin. I think as we think about it, we -- Gary's comments, he alluded to the fact that the Dollar Tree business mix has become, what we would call more normalized. So obviously, I do believe that as we look at Q2, that can be a positive compared to Q1. I think another item to continue to think about is as we look at diesel fuel costs. For Q1, they were down, on average, about 12% year-over-year. It started at the beginning of Q2, down 25%. Now it's a small piece of the overall freight rates. That's helpful.
The other thing I would mention is we began the year with the expectation that we would see increases in our import freight and with our contract that begins in May. We didn't see the increase maybe that we thought we would see. So I think there's a little benefit in the back half related to that as we go forward. So a lot of moving pieces. I think distribution costs, I think if you look at that, I think there's going to continue to be pressure on our buildings that we -- where throughput is very high right now. As you can imagine, as we try to get our inventory -- our essential inventory caught up and along with the normal business. I think there could be a little pressure as we continue there. I think the company is working on a lot of things. And as always, I think we did a good job of controlling expenses in general in Q1. And I think we'll always have about a huge focus to continue to do that as we go through the year, no different than any other year and try to keep that SG&A growth at a very reasonable point.
Operator:
[Operator Instructions] We'll take the next question from Peter Keith of Piper Sandler.
Peter Keith:
Gary, you'd commented that Dollar Tree is now running, I guess, in May, at a level you're accustomed to seeing. So the 2 questions on that is, would that imply kind of an up-low single-digit run rate for the quarter? And then secondly, just thinking about the exposure sort of party and celebrations, is Dollar Tree being negatively impacted at this point because there's still fewer get-togethers and potentially fewer celebrations?
Gary Philbin:
Well, let me answer the second one first. Clearly, we did see the impact of shelter-in-place. Obviously, parties took the biggest hit to that, but I think the resiliency of our customer and just their creativeness that we've seen out there with the drive-through workday parties, what's been happening in graduation. We actually comped on graduation balloons last week, which I thought was just remarkable for our business. Now party is a big category for us, we split it into our celebration in paper. So the celebration is actually doing quite well right now. Party paper, as we called out before, is the piece that's lagging.
On the other hand, Crafts, a category that we didn't talk about a year ago is now a significant category in dollars. The comp is something that customers have responded to. And I think it sort of speaks to families are trying to figure out how to entertain themselves with the magic of products that you can buy for a dollar at Dollar Tree and even at Family Dollar with toys and some of the home essentials there, too. Anything related, kitchen, bathroom, bedroom, outdoor living. I mean I sort of put it into those buckets. So that's how I think about it. And then we're early into the quarter. I think what we want to call out on the -- what we see in Dollar Tree was it's a new normal. But it's certainly, at least in terms of the categories that we are seeing respond, feels a lot more like we're used to. We don't have any huge category or maybe celebrations, holidays until we get to the back half, really, right? We go from Memorial Day, the outdoor grilling to back-to-school, whatever that's going to trend to be in the early fall. After Easter, we like what we see. We're not having the same kind of impact on the seasonal side that we have all focused on 1 week in April with Easter. So I think that also lets us sort of spread our opportunity out there in the store on what we merchandise and what we put on display. And I think what we're encouraged with is the things that our customers needed, they have found in both stores and have bought at elevated levels now, really, Family Dollar, starting with the April time frame, and now it seems like Dollar Tree is getting back to its normal cadence.
Peter Keith:
Okay. I want to ask a separate question and maybe asking you and the team to put your economist hats on, which I know can be a little bit dangerous but it's on the federal unemployment benefit that's being paid out right now of $600 per week, that, at present time, is set to expire at the end of July. And obviously, no one can predict what will happen. But if that were to expire, do you view that as a notable negative to the business and maybe to the spending power of your core customer? Or conversely, does it allow you to pick up some share with your value offering?
Michael Witynski:
This is Mike. We think about it as that goes away that we will be in a great position as a value retailer when people are unemployed and they don't have that source of income. They will need value more than ever. And we should be in a great position to provide that for them.
Gary Philbin:
Yes. It's not 2008 for all the obvious reasons. And it's -- what our customer has right now is money in their pocket. That's obviously a tailwind for anybody that has doors open. In 2008, folks lost jobs, too, and they needed us and they found this. And I think that's some of what we're planning for as we take a look into our crystal ball here, back half of the year into '21.
Operator:
Our next question will come from Michael Lasser of UBS.
Michael Lasser:
Gary, what percent of Dollar Tree sales relates to gathering? Presumably party is a big piece of that, but it extends also across seasonal and discretionary as well. Would you say it's 10% of sales? 20% higher than that?
Gary Philbin:
Well, that's a tough one. I mean, I would just point out sort of what we've seen is that we've seen -- if we just take a look at Easter, what was impacted was obviously the pure Easter product. Along with that, party and Candy was the 490 basis points impact for that holiday. But I think it spreads a little more out once you get past that big holiday. I think party is where we've obviously made it one of our key categories. And it's sort of bifurcated into what people can buy right now for celebration. Parties -- birthday parties are still going on. They're just happening in a different way. Graduations are still going on. They're just happening in a virtual environment. The things that get sold with that, now we're starting to see selling close to the same rates we saw before.
The party paper is a little different. That goes to some gift-giving and some other things that I think it will catch up over time. It's just a slower burn that's kind of sad. And it's -- just take a category like stationery, it means kids are at home. There are parents trying to teach virtually or online and they needed school supplies, and so a category like that picked up. I mentioned craft. But you go down the discretionary line, people are still buying now, I think, on a normal cadence of what they have been new to on dare say, a normal shopping trip. What we're just seeing is they're coming in shopping with intent. Folks aren't coming in to buy a soft drink and in a candy bar. They're coming in because they have a need and right now, Dollar Tree and Family Dollar filled out 20', 21'.
Michael Lasser:
And my follow-up is on the Family Dollar gross margin. It is up year-over-year but against a really easy comparison, particularly on a 2-year basis. So how should we think about the trajectory of the gross margin at Family Dollar understanding that mix might have had some issues in the first quarter? But what's it going to take to be able to get this business back to a 26% to 27% gross margin? And how quickly is it -- do you expect that, that's going to happen?
Gary Philbin:
Yes, Mike, I think as far as the time line, that's maybe the harder part of the equation there. I think, obviously, we're very happy with where we're headed. And obviously, the H2 renovations are a big part of that. And just the overall work that the merchant team is doing on the discretionary side of the business also plays a big role in this. And again, I think our opportunity here is to get more people in the store, show them the assortment and the reassortment and get them excited about their Family Dollar store that they shop. And I think -- so the opportunity is there. I think, again, obviously, increased volume always helps. But I think changing our trajectory of mix potentially plays a bigger role on an overall basis. We want to sell more consumables, but obviously the discretionary categories will play a bigger role.
And then there's other things that we have to do a better job with. We've talked about shrink the last couple of years, and it's not where we wanted to be in our Family Dollar stores. And we have worked because the team is working hard, but there's more work to be done there even though we saw some improvement in Q1. I think if you look at other line items in there, obviously, markdowns have been heavy the last couple of years. I think we feel better about that as we get through this year. We talked about Q1 being more markdowns originally when we went into the plan because of the fact that we'd be working on a discretionary reassortment. But I think we've moved through that with the sales that we've seen. So I think going forward, we have this opportunity. And I think the team is working hard to make that consumer realize that it is a new assortment, a new mix and I think it'll be exciting to them.
Michael Lasser:
Can I just clarify one thing? One of your competitors reported this morning that they've seen a moderation in their cost trends in recent days. Have you seen the same thing?
Gary Philbin:
I don't think that's something that we would comment on, Michael.
Operator:
Our final question will come from Paul Lejuez of Citi.
Paul Lejuez:
Curious on the Family Dollar side, if you have any idea about the number of new customers that may have come into the network over the past several months. And then second, just to go back to the Dollar Tree gross margin. Curious, if we take mix out of the equation, if maybe you can talk about the gross margin within categories relative to themselves on a year-over-year basis, where you're seeing increases and decreases.
Gary Philbin:
Well for -- clearly, as I have mentioned, I would tell you anecdotally from our folks in the field that just tell us they're seeing new customers coming in. A data point we do track is on customer feedback that we see folks who identify themselves as new customer. And then on a week-in, week-out basis, we see the number of folks that actually sign up for the first time using Family Dollar app, which we saw a spike on as people were looking for essentials. So that's our vector, has been on me -- to us that we've had an opportunity here to showcase our H2 stores, but also just improvement in our store base at Family Dollar. So that's a positive that [ might work ].
For Dollar Tree, on the margin mix, when you think about that 490 basis point shift, I mean, I guess there's a start there. I mean that was the low point for us, losing that amount of business on a key holiday in the discretionary business. And we're getting that back to normal now. And I think if you're asking the question around if we think we'll get mix and mark-on. Well, mark-on, just fine. And when we take a look at categories like Craft now that are comping outside the norm, that's going to be a help. So as we get back to a more normal mix, the mark-on's just fine and then to Kevin's point, the thing down the line that still deserve our attention, we do have to do better on shrink. We're willing to spend more in our DCs right now to get essentials to our stores. That's probably going to be with us through at least Q2, if not past that. And when you're bringing in essentials, that does have an effect on the fact that you're paying basically the same freight on lower value trailers of bleach or paper towels or whatever it is compared to the normal mix. Those are sort of the near-term and short-term things that -- the way I'm thinking about it. But we're in a different place on mix right now, and we would expect Dollar Tree's gross margin to get the help from those that I called out.
Operator:
And I'd like to turn the conference back over to Randy Guiler for any additional or closing remarks. .
Randy Guiler:
Thank you, Shannon. Thank you for joining us for today's call and especially for your continued interest in Dollar Tree and Family Dollar. Our next quarterly earnings conference call to discuss Q2 results is tentatively scheduled for Thursday, August 27, 2020.
Operator:
That does conclude today's teleconference. Thank you all for your participation. You may disconnect.
Operator:
Good day, and welcome to the Dollar Tree, Inc. First -- Fourth 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.
Randy Guiler:
Thank you, Britney. Good morning, and welcome to our call to discuss Dollar Tree's performance for the fourth fiscal quarter and fiscal year 2019. On today's call will be CEO, Gary Philbin; Enterprise President, Mike Witynski; and CFO, Kevin Wampler.
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 annual report, 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.
In the fourth quarter, the company incurred several discrete charges as described below:
a 1 -- a $313 million noncash charge for goodwill impairment; a $24.6 million reduction in tax expense for the reversal of a valuation allowance related to the company's foreign net operating loss carryforwards; an $18 million charge to the litigation reserve; and a $0.3 million acceleration in noncash deferred financing costs associated with the debt prepayments. These items are detailed in the reconciliation of non-GAAP financial measures in today's press release. Unless otherwise noted, all margin, net income and earnings comparisons presented today exclude the impact of these discrete charges from the fourth quarter and fiscal year. At the end of our prepared remarks, we will open the call to your questions. [Operator Instructions]
Now I will turn the call over to Gary Philbin, Dollar Tree's Chief Executive Officer.
Gary Philbin:
Thank you, Randy. Good morning, everyone. I'm proud of our team's accomplishments in fiscal 2019, including the successful consolidation of our store support centers, the material acceleration of the family Dollar store optimization program and the initial launch of our Dollar Tree Plus! initiative. For Q4, despite the compressed holiday shopping season, with 6 fewer days between Thanksgiving, Christmas, we delivered positive same-store sales for the enterprise, while managing margins and costs effectively to deliver adjusted EPS of $1.79, near the top end of our guidance range.
Fiscal 2019 was an important year for our organization as we further developed the foundation and fundamentals to grow and improve our business. Our accomplishments for 2019 include the following:
first, consolidation of our store support center brought the Family Dollar and Dollar Tree teams together in 1 building. This was a major project and announced in September of 2018 and completed this past July.
Our working in one space has increased the energy; benefited our culture and driven collaboration, efficiency and teamwork that will enable us to provide even better support to our stores as we move through 2020. Our store support consolidation allowed us to organize our management around the key processes within the company and flattened our organization to accomplish the speed and focus we need to have on key initiatives this year. We've made significant progress on the Family Dollar store optimization program, including closing more than 400 stores; rebannering 200 Family Dollar stores to Dollar Trees; and renovating more than 1,100 mature stores at Family Dollar into the H2 format. Third, the Dollar Tree Plus! was introduced around midyear, Mike will provide an update on the initiative, including the details of our Dollar Tree Plus! 2.0 that is being implemented into our test stores this month. Fourth, we repurchased 200 million in shares during 2019. In recent years, we have made significant process of paying down debt. We have a scheduled debt payment for $250 million in April 2020, and we currently have an $800 million authorization remaining on our Board repurchase plan. Our merchant teams traveled overseas for their annual post-holiday buying trip in January. This trip was led by our enterprise chief merchant. The teams continue to work directly with a diverse group of qualified factories. In fact, we had vendors from 8 other Asian countries that tend our qualifying open buying day. We consider this to be one of our most successful buying trips. We were pleased with the continued support we are receiving from our extended vendor group, and we were able to buy the value in key items and departments for both banners for the 2020 holiday season. Importantly, all returned from China healthy and safe despite of the news regarding the outbreak of the coronavirus. Let me give you a bit of an update on the coronavirus as it affects our supply chain as we see it today. Our global sourcing group and merchants, along with our logistics team, are meeting daily and updating our progress on visibility to individual purchase orders. Generally, we are seeing production pickup, and factory attendance is increasing each week. Our global sourcing team in China and third parties that provide quality assurance inspections are nearly at normal levels. All ports and third-party freight consolidators are open and operating at near-normal levels, and we are getting all needed space on vessels for our freight. At this point, all of our Easter merchandise and lawn and garden seasonal product is in our domestic supply chain, either in distribution centers or flowing to stores. At this point, we see a very small percentage of product canceled and some product moving on to later delivery, usually by a few weeks. And our teams are working to mitigate with sources elsewhere, including domestic sources, to mitigate any effect there. More to come. In December, we announced enterprise-level organizational leadership changes to enhance the company's execution of our strategy and to improve performance across the Dollar Tree and Family Dollar business segments. Among the management changes were the promotions of Mike Witynski to Enterprise President; Rick McNeely to Enterprise Chief Merchandising Officer; and Tom O' Boyle to Enterprise Chief Operating Officer. These and other actions are designed to increase enterprise-wide focus, efficiencies and accountability. With Mike, Rick and Tom, we now have our senior leadership working together across the company with increased urgency to move the needle on initiatives that will help us deliver bottom line results that will drive value to our shareholders and customers. Since joining Dollar Tree in 2010, Mike Witynski has been a key executive and partner in driving performance across the organization. In particular, Mike has had the store excellence, operational initiatives and merchandising programs to drive sales and margin and has been hands-on in managing our tariff mitigation efforts the past 18 months. Mike's promotion to Enterprise President will continue our progression of elevating customer-facing initiatives in merchandising and store operations. I'll now turn the call over to Mike.
Michael Witynski:
Thank you, Gary, and good morning, everyone. For the fourth quarter, enterprise same-store sales grew by 1.8% to -- enterprise sales grew by 1.8% to $6.32 billion. Our consolidated same-store sales increased 0.4%. Both of our segments, Dollar Tree and Family Dollar, were negatively impacted by the shortened holiday shopping season. We were also cycling an early release of February SNAP benefits into January a year ago.
We delivered adjusted EPS of $1.79 for the quarter. Regarding the Dollar Tree segment, sales highlights for the fourth quarter include a 1.4% same-store sales growth, which represented Dollar Tree's 48th consecutive quarter of positive comps. Dollar Tree had increases in both traffic and ticket, with average ticket being slightly outpacing the traffic increase. Geographically, our strongest-performing zones were in the upper Midwest and the Northeast. Regarding the cadence of comps to the quarter, December and January were our strongest months. Dollar Tree had positive comps in both consumables and discretionary. We are pleased with the performance of our seasonal business and closeouts for both Thanksgiving and Christmas. Arts and crafts, pet supplies and snacks and beverage were also strong during the quarter. During the quarter, we added Snack Zone to 49 stores, bringing our fiscal 2019 total to 1,002 stores. This surpassed our goal of 1,000 stores for the year. We now have Snack Zones in 2,136 Dollar Tree stores. We continue to be pleased with the introduction of our Crafters Square initiative as well. Crafters Square is now in more than 650 Dollar Tree stores and consists of new expanded assortment of arts and craft supplies, all priced at $1. We plan to expand this program to many more Dollar Tree stores later this spring. The values are tremendous, and our customers are responding. Using the store locator function at dollartree.com, you can quickly locate the nearest Dollar Tree location with the Crafters Square selection. Please drop by and check it out. Now looking at Dollar Tree Plus! We are taking learnings from the first phase and moving into our next phase of development, which we refer to as Dollar Tree Plus! 2.0. Among the elements from our learnings that will be arriving in the test stores later this month include a shift away from consumable items into more discretionary margin-enhancing product mix. Categories will include electronics, toys, health and beauty, craft, seasonal and more. We are also updating and improving the in-store design elements to create a more excitement around the program and help deliver -- to help further delineate the $1 product from the multi-priced items. We continue to focus on finding value with our customers will recognize and our assortment will reflect retails at $5 and below. We feel this program will better represent what customers have come to expect from Dollar Tree, extreme value on an array of exciting items. More to come as we continue to learn, evolve and develop our Dollar Tree Plus!
Regarding Family Dollar segment, sales highlights for the fourth quarter include:
up against Family Dollar's toughest quarterly compare from the prior year and a compressed holiday selling season, same-store sales were down 0.8% for the quarter; comps were relatively balanced geographically, with the Western zone delivering a positive comp.
Regarding cadence of comps to the quarter, both November and December were slightly negative. January, which was cycling the early release of SNAP benefits from a prior year, was our lowest comp month. The consumable side of the business delivered 13 -- delivered its 13th consecutive quarter of positive same-store sales. Importantly, all geographic zones have positive comps and consumable. The performance of discretionary side of our business did not meet our expectations for the quarter, and the performance was relatively the same geographically. Shortly, I will share details on how we are addressing the discretionary business at Family Dollar. Now regarding H2. Our customers continue to be excited about the H2 renovations at Family Dollar. In the fourth quarter, H2 stores in their first year are comping at greater than 10% on average. These stores are driving greater loyalty, earning repeat visits and increasing value perception. We are committed to this store format and plan to renovate at least 1,250 Family Dollar stores to the H2 format in fiscal 2020. We began rolling out H2 format in Q3 of 2018. We are pleased that 2/3 of the comp lift is being driven by traffic and especially by the fact that H2s are working in both urban and rural locations. As a reminder, in our H2 stores, our efforts to drive performance are focused on creating price impact; highlighting our Family Dollar private brands; offering expanded and frozen food for convenient fill-in trips; expanding immediate consumption for snacks on the run; adding new impulse areas to drive value and margin; and introducing $1 impact section with ever-changing assortments of value, newness and excitement. The customer feedback we are receiving gives us credit across these areas of the store. We continue to refine the discretionary assortments to drive more business in these areas of the store. Now regarding the real estate for the enterprise during the quarter. We completed more than 230 projects, including 112 new stores, 17 relocations; 10 rebanners from Family Dollar to Dollar Tree, meeting our goal of 200 for the year; 5 Family Dollar renovations to the H2 format; and 95 closing stores, primarily at the end of the lease term. We ended fiscal 2019 with 15,288 stores. Now let me share a few thoughts of our Family Dollar business. I believe our biggest challenge in turning around Family Dollar has been on the discretionary side. Our consumable business is growing well and is driving traffic, improving the performance in the discretionary side of our business, is a key objective of Rick McNeely and his team in 2020. Rick has been a proven leader at Dollar Tree business for more than 15 years. I've seen Rick develop and drive key initiatives in seasonal, stationery, party, Snack Zone and most recently in our Craft business over the years at Dollar Tree. I'm confident that Rick and his leadership team will take the same approach with driving our discretionary business at Family Dollar. Rick will bring an unwavering focus on our customer by bringing the right products with the right value at the right price points for her basic needs, price, value and convenience on basic products is critical to our success. On the most recent buying trip in January, I've already seen the discretionary import process come to life. Rick brought the same rigor and processes that Dollar Tree has developed over the years for our import business to Family Dollar. The process has started with the customer in mind and delivering on our expected business goals, then Rick and the team dive into the category, the subcategory and the product and price, line by line, item by item. Every item gets scrutinized for value, meeting our customer needs and delivering on our financial goals. Now we have 1 leader. We are in the same building on the same floor and going on the same import trips. Rick brings a consistent singular process and voice to both segments of our business. He has an experienced, proven leadership team in place. This allows for sharing insights, moving with speed and leveraging efficiencies with our combined value on specific items and/or shared vendors. Our merchant teams are engaged, energized and equipped to drive the discretionary business at Family Dollar going forward, and I look forward to the change. I will now turn to Kevin to provide more detail on the fourth quarter performance and our initial outlook for 2020.
Kevin Wampler:
Thank you, Mike, and good morning. Consolidated net sales for the fourth quarter increased 1.8% to $6.32 billion, comprised of $3.52 billion at Dollar Tree and $2.8 billion at Family Dollar. Enterprise same-store sales increased 0.4%. And on a segment basis, same-store sales for Dollar Tree increased 1.4% and for Dollar -- Family Dollar decreased 0.8%. Overall, our gross profit was $1.96 billion compared to $1.91 billion in the prior year's quarter.
Gross margin was 31% of sales compared to 30.8% in Q4 of 2019. Gross profit margin for the Dollar Tree segment decreased 90 basis points as a percentage of sales to 36.2% when compared to the prior year's quarter. Factors impacting the segment's gross margin performance for the quarter included merchandise costs, including freight, increased approximately 40 basis points, primarily due to the impact of List 4A tariffs, which represented approximately 65 basis points of headwind. This was partially offset by lower freight costs. Distribution costs increased approximately 25 basis points, primarily due to higher payroll costs and depreciation. Shrink increased approximately 15 basis points based on unfavorable inventory results and an increase to the accrual rate. And occupancy costs increased approximately 10 basis points based on loss of leverage from the lower comp sales.
Gross profit margin for the Family Dollar segment improved 100 basis points to 24.6% during the fourth quarter. The year-over-year improvement was due to the following:
markdown expense improved approximately 100 basis points as we cycled the $40 million reserve for Q4 of 2018. And merchandise costs, including freight, decreased approximately 60 basis points, driven primarily by improved initial mark-on and freight costs. These were partially offset by a higher percentage of lower-margin consumable sales. These benefits were partially offset by occupancy costs, which increased approximately 35 basis points due to higher real estate taxes and loss of leverage on lower comp sales. Distribution costs increased approximately 15 basis points due to increased payroll costs at the DCs, and shrink increased approximately 10 basis points.
Consolidated selling, general and administrative expenses, including discrete charges, were 27.1% of net sales compared to 65.4% of net sales in the prior year's quarter. Excluding the discrete charges in 2019 and 2018, SG&A as a percentage of net sales was 21.9% compared to 21.3% in the prior year's quarter. For the fourth quarter, the SG&A rate for the Dollar Tree segment, when excluding its portion of the litigation reserve as a percentage of sales, increased to 20.1% compared to 19.7% for the fourth quarter of 2018. This increase was due to the following:
payroll cost increased approximately 30 basis points, primarily due to an increase in store hourly payroll due to higher average hourly rates; and additional output to support store initiatives. Operating cost increased by approximately 10 basis points, resulting from increased debit and credit card fees due to higher penetration and higher insurance costs, and depreciation increased approximately 10 basis points.
The SG&A rate for Family Dollar segment, when excluding the goodwill impairment and the litigation reserve, increased 20 basis points to 21.5% compared to 21.3% for the fourth quarter of 2018. The increase was primarily due to the loss of leverage on negative comp sales. Depreciation and amortization expense increased approximately 15 basis points, and operating expenses increased approximately 10 basis points, resulting primarily due to higher debit and credit card fees and increased insurance costs comparable to Dollar Tree. Corporate and support expenses increased 15 basis points, primarily related to higher incentive comp and stock compensation expense compared to the prior year quarter based on timing of performance adjustments between Q3 and Q4 year-over-year. On a consolidated basis, excluding discrete charges for -- from 2019 and 2018, adjusted operating income was $580.4 million compared with $632.6 million in the same period last year, and adjusted operating margin was 9.2% of sales compared to 10.2% of sales in last year's fourth quarter. Nonoperating expenses for the quarter totaled $39.9 million, which was comprised primarily of net interest expense. Our effective tax rate for the quarter was 41.3% compared to 5.1% in Q4 of 2018. These rates are affected by the noncash goodwill impairment charges recorded in 2019 and 2018 that are not tax deductible. Without the goodwill impairment charges included in net profit before tax, the tax rates for Q4 2019 and Q4 2018 were 16.6% and 21.2%. The decrease in Q4 of 2019 rate is a result of a reduction in tax expense of $24.6 million for the reversal of a valuation allowance related to the company's foreign net operating loss carryforwards. For the fourth quarter, on a GAAP basis, the company had net income of $123 million or $0.52 per diluted share. This compared to a GAAP net loss of $2.3 billion or a loss of $9.69 per share in the prior year's quarter. On an adjusted basis, diluted earnings per share for Q4 2019 were $1.79. Please refer to the reconciliation of non-GAAP financial measures in today's press release. Looking at the balance sheet. Combined cash and cash equivalents at fiscal year-end totaled $539.2 million compared to $422.1 million at the end of fiscal 2018. Outstanding debt as of February 1, 2020, was approximately $3.8 billion. The company paid $500 million in January 2020 on its $750 million floating rate note. The remaining $250 million is due April 2020. Inventory for the Dollar Tree segment at quarter end increased 8.4% from the same time last year, while selling square footage increased 7.1%. Inventory per selling square foot increased 1.2%. We believe that current inventory levels are appropriate to support the scheduled new store openings and our sales initiatives for the first quarter. Inventory for the Family Dollar segment at quarter end decreased 7.7% from the same period last year and decreased 2.8% on a selling square foot basis. Based on store closures, the Family Dollar segment has 5.1% less square footage outstanding. Capital expenditures were $252.5 million in the fourth quarter versus $194.4 million in the fourth quarter last year. For the year, capital expenditures totaled $1.035 billion. For fiscal 2020, we are planning for consolidated capital expenditures to be approximately $1.2 billion. Capital expenditures will be focused on 550 new stores and 1,250 Family Dollar H2 renovations. The addition of frozen and refrigerated capability to select existing Dollar Tree and Family Dollar stores, IT system enhancements and projects, development of our Chesapeake campus, installation of LED lighting as well as HVAC and flooring replacements in select stores and the completion of construction of our new distribution center in Rosenberg, Texas as well as the start of construction on Dollar Tree regional DC17 and a high-velocity DC. Depreciation and amortization totaled $179.1 million for the fourth quarter and $166.7 million in fourth quarter last year. For the year, depreciation expense totaled $645 million.
For fiscal 2020, we expect consolidated depreciation and amortization to range from $680 million to $690 million. Our initial outlook for fiscal 2020 includes the following assumptions:
our outlook does not include any potential impact related to the supply chain or other aspects of the company's business for the COVID-19 coronavirus. For same-store sales, we are forecasting low single-digit positive comps for the year.
Calendar considerations for 2020 include the following:
Easter will be 1 week earlier, which will have an estimated $10 million negative impact on sales in the first quarter; and there will be 2 additional selling days between Thanksgiving and Christmas compared to 2019, which should positively impact Q4 sales by an estimated $12 million.
On a GAAP basis, we expect to incur approximately [ $48 ] million less in onetime costs in 2020 compared to 2019. This relates to costs in 2019 associated with store closings, markdowns and accelerated rents as well as consolidating our store support centers. With regard to tariffs, our outlook includes an estimated $47 million of incremental costs in fiscal 2020, with nearly all of it to be incurred in the first half of the year. From a GAAP EPS standpoint, we believe our toughest year-over-year compare will be Q1, as we are incurring incremental tariff cost of approximately $25 million compared to Q1 of 2019. Additionally, we are planning on increased promotional activity for our Family Dollar banner as we rebuild our discretionary merchandise assortment. While our first quarter outlook includes the expected pressure from these tariffs and increased promotional activity, we believe we are well positioned to deliver improved sales, operating margin and earnings in the following 3 quarters and for full year 2020. We expect continued pressure on store payroll based on competitive markets; states increasing minimum wages; unemployment levels, including the company's initiative plans, including H2 renovations, Snack Zones and Crafters Square projects. We continue to partially offset these average hourly rating increases through productivity initiatives in our stores. We estimate year-over-year domestic freight cost to be slightly lower in 2020. Import freight rates will be higher as we annualize our April 2019 rate increases. In addition, we expect the new clean fuel regulations for ocean vessels to contribute to higher import rates in 2020. We expect distribution costs to be a headwind during the year from wage pressures created from the tight labor market for both banners and depreciation cost pressure specific to the Dollar Tree segment. We do expect the distribution cost headwinds to dissipate as we go through the year as productivity initiatives positively affect the network. Net interest expense is expected to be approximately $38 million in Q1 and approximately $145 million for fiscal 2020. We cannot predict future currency fluctuations. We've not adjusted our outlook for currency rate changes. Our outlook assumes a tax rate of 23% for the first quarter and 22.8% for fiscal 2020. Weighted average diluted share counts are assumed to be 238.1 million shares for Q1 and the full fiscal year. Our outlook does not include any share repurchases. The company has $800 million remaining under the Board repurchase authorization. For the first quarter, we are forecasting total sales to range from $5.89 billion to $5.99 billion and diluted earnings per share in the range of $1 to $1.09. These estimates are based on a low single-digit increase in same-store sales and year-over-year square footage growth of 1.5%. For fiscal 2020, we are forecasting total sales to range between $24.21 billion and $24.66 billion based on a low single-digit same-store sales increase and approximately 3.1% selling square footage growth. The company anticipates GAAP net income per diluted share for fiscal 2020 will range between $4.80 and $5.15. And looking at our 2020 outlook, when compared to 2019 performance, the upper end of our 2020 guidance is $5.15. Adding back the impact of $47 million or $0.15 per share in incremental tariffs in 2020 and $28.6 million or $0.12 per share for the equalization of tax rates for both years, brings the adjusted EPS for 2020 at the high end to $5.42. When compared to the 2019 adjusted earnings per share of $4.76, 2020 adjusted earnings of $5.42 would be a 14% increase year-over-year. I'll now turn the call back over to Gary.
Gary Philbin:
Thanks, Kevin. Work from our teams in 2019 set the stage for us to be able to grow and improve our businesses in 2020. Our teams are able to achieve several important milestones through '19 and mitigate some of the challenges. The time, effort, resource and focus on bringing more than 500 jobs to Chesapeake, Virginia by consolidating our store support centers; the Family Dollar store optimization effort to close more than 400 stores and rebanner another 200; the doubling of H2 renovation projects from 518 to more than 1,119; all the tariff mitigation efforts regarding trade during the year; and the impact last year to our balloon and party business from the helium shortage.
Here's the good news for 2020. Our management team is in one place, with our senior leadership, focusing on the priorities and initiatives to drive the business. Our management team is tapped to do the following:
as always, drive our top line with exciting merchandising execution; improve on shrink; drive supply chain efficiencies, both in freight and distribution costs; improve the mix on the discretionary side of Family Dollar, creating more value; reinvent the WOW of Dollar Tree, as always, with our new drive the business opportunities that you heard Mike describe and Dollar Tree Plus! continue our tariff mitigation on each buying trip and the continued refinements to drive the H2 format this year and next. Our customers are responding to the store layout and assortment and price impact. Our teams are focused and energized and well prepared for 2020.
As we start Q1, we have seen our customers at Dollar Tree respond to our first big seasonal holiday, Valentine's Day. Helium was in good supply, and certainly not the issue we had last year. We had a terrific holiday, with sales, traffic and positive comps in our party department. For Family Dollar, we have been focused on tax refund time to drive our business into departments that our customer spends on this time of the year. We have increased promotional activity during this important time. And we are at the peak of it right now and like the traffic we are seeing across those departments. All this progress will not be possible without the contributions of each and every one of our associates. For them, in more than 15,200 stores across the U.S. and Canada, our network of 24 distribution centers and our store support center in Chesapeake, Virginia, I'd like to just add my thanks to all of them for their ongoing commitment, dedication and efforts to serve our customers every day. Our efforts in 2020 are focused on the urgency around our key initiatives to drive bottom line results in supply chain, our continued progress on H2 store renovations, shrink, elevating training at field and store level for increased customer engagement. In summary, we are -- we continue to focus and make meaningful progress to grow and improve our business for both brands. We are well positioned in the most attractive sector of retail to deliver continued growth and increase value for our shareholders. The combination of more than 15,200 Dollar Tree and Family Dollar stores provides us the opportunity to serve more customers in all types of markets. Our teams are excited about seizing the opportunities in tackling the challenges ahead of us in 2020. Operator, we're now ready for questions.
Operator:
Yes, sir. Thank you. [Operator Instructions] Our first question comes from Matthew Boss with JPMorgan.
Matthew Boss:
So maybe just to start off. At the Dollar Tree concept, what do you attribute if we take a step back, the roughly 100 basis points of gross margin contraction, the last 2 years? And as I break it down, what I'm trying to figure out is how much do you see as transitory or recapture opportunity? Do you feel comfortable that the consumable mix pressure is now in the rearview mirror? And I guess, to put it all together, multiyear, what do you think is the sustainable gross margin at the Dollar Tree banner versus that 35% to 36% pretty consistent historical level?
Kevin Wampler:
Sure, Matt. This is Kevin. Thank you for the question. Again, I think, obviously, moving pieces in the last couple of years. And I think, obviously, most recently, tariffs this year, obviously, have been a headwind, which, obviously, will fully cycle as we go through the year. The team continues to work to mitigate and do everything we can to provide great value to our consumer through that process. I think the other thing, if you look at our mix, our mix at Dollar Tree continues to be good.
I think, obviously, there's been some things outside of the actual product cost at the end of the day. So if you look at distribution costs, you look at shrink, some items that traditionally, we've been very good at controlling, and we can be very good in the future as we go forward as well. I think those are the items that we have to work on. I think the -- but overall, the consumable and discretionary business, we feel very good about where we're at.
Gary Philbin:
Matt, Gary. I would just say this. Long term, we've always been between 35% and 36%, and that's what we're going to get back to and operate within those ranges. And I mean, you nailed it. The transitory issues have been tariff, distribution, freight, shrink. Those are all the things that I think the longer we are able to navigate around them, we'll be able to see them go away and some effort on each buying trip as if tariffs stay in place, we mitigate them.
The mix, I'm pleased with. We've seen, despite the fact that we always drive traffic in that Snack Zone, our customers are really going to be excited about Crafter Square. And that's the other side of the margin equation that we've always done at Dollar Tree. So it's always a 1, 2 step with us. And I think we get back to the 35%, 36% for Dollar Tree.
Matthew Boss:
Great. And then just to switch gears to Family Dollar. So as we think about the cadence of the year, do you see comps in the positive low single digits in the first quarter? Or is it more a back-end loaded type of a trajectory this year? And what exactly is driving the elevated promotional activity to start the year at Family Dollar?
Kevin Wampler:
Yes, Matt. I think we do look for positive comps in each quarter of the year. We do look for the business to get stronger as we go. We will cycle some red tag sales from our stores that we were closing last year. So we have a little higher hurdle from that as we go. But I think that will be fine. So I think that's -- from that perspective, we would expect positive as we go through the year.
Gary Philbin:
The other piece, Matt, is we'll be building up on H2s as we go through the year as well. And regarding the promotional activity, I would just tell you, we knew there was a shortened holiday season for the Christmas season. And we just went into this year knowing that while we're going to be cycling some of the red tag event, we also really got to get after the discretionary side of our business at Family Dollar. And tax time last year, I think we just had an opportunity to build on. It's when our customer has money in her pocket. It's what she's shopping the store for things that she does always have money for. And it shows up in bedroom, bathroom, kitchen items that are basically the capital expenses for her for the beginning of the year. So we want to go into this season with really loaded with the right items, what we think is the appropriate promotional activity in Q1 during this important tax time.
Operator:
[Operator Instructions] Our next question comes from Robby Ohmes with BofA Global Research.
Robert Ohmes:
I guess, I want to just follow-up a little bit on the Family Dollar strategy. I mean it sounds great with Rick McNeely very focused on getting the discretionary going. But can you give us how should we think about the long-term outlook for Family Dollar, if discretionary does continue to underperform? Can you still get the gross margin up or the profit contribution up?
And also the weakness at Family Dollar from a same-store sales perspective, is there any pressure you're seeing from all those Dollar general stores that have opened over the last couple of years as well?
Gary Philbin:
Robby, this is Gary. Listen, I don't think it's either/or. I mean the same way that at Dollar Tree, we've always gone after what you do to drive the business. That tends to be on the consumable side of the store. And then what do you have to do that is on the customer maybe want list instead of needs list. So what Rick brings to it is that process. And our strategy is very clear. We're speaking with one voice, not just to our people, but also to the trade, which goes a long way. And a lot of the discretionary business is things that we can import, the things that we can drive the business on because we invent the product.
Yes, our customers need basics, but when you get to the seasons, when you get to cook out time, when you get to celebrations, we're introducing Hallmark cards into Family Dollar this year. You heard us talk an awful lot about that over the last 18 months at Dollar Tree in the same kind of card assortment, slightly different, will be into Family Dollar stores as well. And even if it's in consumables, I think it's important to just point out maybe what's different at Family Dollar is our private brand business. And while it's, "a consumable," it's a higher-margin category across all of our own private brands. So that's something that we drive as well. Our immediate consumption is also a consumable, a snack, a drink. Those also are above-average margin. So those are the things that Rick is going to bring to the party. And then like all good retailers, we have competitors out there. And what we like about H2 is the lift we've been getting with the format has typically been in places where we don't see because we have that kind of competition out there. So that's why we're happy with the H2 lift as we go into 2020.
Robert Ohmes:
That's helpful. And just a quick follow-up. Kevin, thanks for getting us to that $5.42 base sort of number for this year when you have everything back. What algorithm should we use for that $5.42 sort of adjusted number for this fiscal year?
Kevin Wampler:
Yes. I think when we think about it long term, Robby, is, obviously, we've got a lot of noise in the number the last couple of years with various charges and onetime discrete costs and so forth. But on a general basis, my viewpoint would always be, we're going to look to grow our bottom line faster than top line. And I think we're always looking to say, can -- we want to grow 10% plus on our EPS. It is always the way we're going to look at it. And I think, historically, we've been able to do that. I think we're going to get back to that as we go forward. And while we don't traditionally use an algorithm per se, that's just how I think about it from a metric standpoint.
Operator:
[Operator Instructions] Our next question comes from Simeon Gutman with Morgan Stanley.
Simeon Gutman:
It's Simeon Gutman. My first question is improving discretionary at Family Dollar, can you talk about what hasn't been working? And I think on the call, you mentioned that the food and consumables were growing or were positive? Does that mean that 2/3 of the business is comping positive? And any other color on that, please?
Gary Philbin:
Simeon, well, I think you've teed it up. The priority for us is to go after the discretionary business at Family Dollar. We've been happy with the consumables because it's been driving the traffic. But like I said before, you got to do both. So what's not working? We can spend a lot of time on that. But I think it's more about our process. It's about the value we bring to our customers as being in stock on the right items and the right store. It's inventing what's new.
I think sometimes we fall into the trap. This is a customer that counts on Family Dollar for basics, without a doubt. You've got to be right on that. You've got to be ready on 1st of month. You've heard me say we got 13 holidays at Family Dollar, 12 1st of the month and the extra ones, the tax refund time. But that also means we got foot traffic in the store and the ability for us to find the right items in apparel, on seasonal, on electronics, on toys, those are the type of things that need value, the marketing behind it, the price-value equation, promotional activity. And really, those are the things that I think between Mike and Rick and the team at Family Dollar are very focused on right now to build this up. And I don't know another way of doing it, Simeon, other than going 4 feet by 4 feet across a store or when we're over in Asia, going through our items. We go through a SKU at a time and say what are we buying? What's the value equation? What's in the marketplace? And that's always been our process. So it's about that as much as it's about the item.
Simeon Gutman:
And I assume it's iterative. But is there a point in 2020 in which you have your best foot forward for some of the buying that you mentioned in Asia? Some of the new items? New resets? When do you have that offering in place to be able to judge if some of the new stuff is working?
Gary Philbin:
Well, on a seasonal basis, we get a grade at the end of every season. So that part is sort of easy. Now as many guys sort of go back and reboot for the next year on what I would consider some of the basics on imports. So we -- but we can accomplish if you've been into an H2 on the impulse tables on our queuing line on some of the basics there every day.
There, we have a chance either to do resets in some of the categories, which might need a major reset or to put in some impulse items that we can tap. So you'll be iterative as we go through the year, both on -- both of those parallel paths, what are we doing across the categories and what are we doing from an in-and-out basis on some of the impulse categories -- it's not -- now unlike what we do at Dollar Tree, but different from the standpoint that there will be items, some at $1, but we have an opportunity to sell to customer here the things that she -- maybe at the end, that was on our list that's something cool at $5.
Operator:
Our next question comes from John Heinbockel with Guggenheim Securities.
John Heinbockel:
So Gary, let me start. In the H2 remodels, what type of discretionary comp lift are you getting, number one? And then number two, when you think about Family Dollar real estate, what are the thoughts right now in additional store closings and/or conversions? Or are you -- where you think you want to be right now?
Gary Philbin:
Well, for the H2 on those -- the lift that we're getting, which we've called down around 10%, it's basically going up with the same way the fleet is. So which I think is a pretty good effort because keep in mind, what we've added in are additional frozen food doors, which fits a consumable line and expands that offering. We've also putting a queuing line that is a bit more of a mix of both discretionary. But the fact that we've sort of -- if you go back to last year, we were talking about a slightly negative impact from the discretionary.
As we've gone through the year, we basically have gotten it to the fleet average. The issue is we need to improve the fleet average. And so part of that is what we're going to do across the entire chain, not just H2. But H2 is built to expand margins. We have put in the WOW tables. We have the opportunity with a queuing line. We have private label primarily displayed in the H2s in a bigger way. We got immediate consumption out there, like I said before, is at a higher margin. So those are the things that, over time, I'm counting on H2 to continue to drive the expansion as we go through our continued refinements of H2. And the second question, John?
John Heinbockel:
Yes, real estate at Family Dollar, right? Do you need to do more closures beyond what you've done this year? And would it be helpful to do more rebannerings?
Gary Philbin:
Well, we've always taken a look at what's it take to stay within the fleet in terms of top line sales, cash contribution. I think last year, what we were able to accomplish with the 400 closings was just get the stores that weren't going to get a lift because, in some cases, too small or the town had shifted, all the various reasons that we called out at the time. Yes, I think we take a look at the end of -- basically a lease term, and we take a look at the future of the store.
Our guidance calls out something -- I would say, history says, between 75 and 90. I think we've put in over 100 this year on closings, and I think that reflects the continued really taking a look at all the stores and what it takes to stay within our store base as we continue to do and get better lifts on our remodels. Our fleet will change. We will have more and more stores be 5 years less -- 5 years or less, since they've been touched last through the new stores, H2 renovations, what we've closed, what we've rebannered. So our customer at Family Dollar is going to see a different fleet of stores.
Operator:
Our next question comes from Chuck Grom with Gordon Haskett.
Charles Grom:
Just, Kevin, just wondering if you could amplify on the complexion of the operating margins in 2020, both at the Tree and at Family. Just kind of what you're expecting by banner. I know there's obviously the tariff and the ocean freight, which looks like it's going to impact the annual number by probably about 20 basis points for the total company. Just wondering if you could just sort of walk through each of the segments for us.
Kevin Wampler:
Yes. Chuck, as we look out, to your point, in total, we are looking for improvement in our gross profit line for the year. Again, it is a little more back half oriented, where we see that improvement as we cycle the tariffs that we called out for Q1 and Q2. And to your point, the tariffs affect the Dollar Tree banner. Probably about 80% of the tariffs are related to Dollar Tree. There are some Family Dollar effect out of those tariffs as well.
So I think if you look at that, I think the other point that we have going on in gross profit is distribution. And I think we've seen a little more pressure on the Dollar Tree side than the Family Dollar side. But in general, I think we'll see -- we're going to see improvement in both and -- as we go through the year. So I think that's kind of how we're thinking about SG&A. On the other side of the equation, the SG&A side, I think, is flat to slightly better. And again, obviously, top line helps dictate that as well as us controlling our costs. And obviously, the pressure point has been store labor with the average hourly rate increases. And again, we always have initiatives to help reduce that, and the team continues to do that. But that's the one point of pressure really on the SG&A side.
Charles Grom:
Okay. That's helpful. And then, Gary, just one for you. Just the thoughts the pivot on the multi-price points. Can you maybe just speak to the number of SKUs? You're going to be testing a number of stores in 2020, how it's going to roll out? And I guess, relative to the performance that you saw last year.
Gary Philbin:
I'm going to hand it over to Mike, if you don't mind, just because he's been leading the charge on this one.
Charles Grom:
No problem.
Michael Witynski:
Yes. Thanks for the question. We look forward to the new categories. There's going to be about 20 new categories across the store in 4-foot sections and the variety of categories that you said. We're excited about them. They'll start landing it, I would say, 2/3 of them in this month and then some in late April, early May and then cleaning up just a few in October.
But we're excited about them. They're going to be more of the general merchandise and the excitement in the WOW. We've looked at the marketplace. We know it's out there. Those price points of $5 and below. And we're going to bring some nice products with some good margins for the company.
Charles Grom:
Okay. And just one more, if I could just sneak in, just the decision not to do more consumables. I guess the question was like, why did it not work? Or you feel like you can just show greater value on the discretionary?
Michael Witynski:
We believe we can show the second part of your thought is the better value. It's what Dollar Tree is known for is bringing that excitement in WOW. We know the manufacturers that can help us produce those products, and we think we can bring more value to the customer in those categories.
Operator:
Our next question comes from Scot Ciccarelli with RBC Capital.
Scot Ciccarelli:
Scot Ciccarelli. Question. Did you guys pick up the extra $19 million that you called out as a tariff headwind in 4Q? Because I think there were some delays on those -- on that tariff implementation. And then related to that, does the threat of tariffs, which can obviously be implemented very quickly, potentially influence how you might be viewing the Dollar Tree Plus! test?
Kevin Wampler:
Scot, as it relates to the Q4 tariffs, again, we did see those flow through as we guided to. And again, in the prepared remarks, I called out the fact that within the Dollar Tree banner itself, it was basically about 65 basis points of headwind. So those did flow through. And as you -- and really the change in tariffs that happened since we last spoke was the 4A going to -- from 15% to 7.5%, but that it actually didn't happen until February 14 after quarter end. So really, everything we talked about when we talked to you last at the end of Q3, it was in place, and we did see it flow through our P&L.
Scot Ciccarelli:
Got it. And then...
Gary Philbin:
Scot just second piece. Dollar Tree Plus! 2.0, I think the way we're thinking about it, here's a chance to expand the circle for Dollar Tree. That's why we're doing it as much as anything to do that and expand margin because we think we have the opportunity here to really manufacture the type of items that we've done at $1 price point.
So let's do some of the same things that create value, create that WOW effect. And that's why we're doing it. So listen, I'd like to think that we're in a stable environment here for tariffs. That gives our team a chance to go over and continue to mitigate on each buying trip and find value and add items and drop items. It's what we do. It's easier when we obviously know the rules that we're playing with, when we go over. So I think Dollar Tree Plus! is about expanding who comes into a Dollar Tree. That's our primary purchase and have them buy more.
Operator:
Our next question comes from Kelly Bania with BMO Capital.
Kelly Bania:
I guess, just another one on mix. As you think about your guidance for this year, what are you planning in terms of mix, particularly at Family Dollar? Obviously, a focus to improve that, but just curious what level of success you're baking in, in terms of that mix improvement?
Kevin Wampler:
Yes, Kelly. I think as you think about it, our consumable mix were approximately 77% consumables at this point in time. So to move it, it takes a lot, as you might imagine. The plan would be to, obviously, have performed better in discretionary this year as we go through. Obviously, we're disappointed in Q4 in that arena. As we go through the year, we think we can positively affect that. It will have moved it a lot in the first year, maybe not a lot, but I think it builds the foundation to continue that improvement going forward is the way we would think about it.
Gary Philbin:
Kelly, I would be disappointed if we don't get to the fourth quarter and have a much better season. Part of it will be we've got a better calendar for sure. Part of it will be some of the efforts we made in January on the buying trip. So I think by the time we get to the holiday season, at Family Dollar, my expectation is we ought to see improvement year-over-year. And that's what we're tasking ourselves with.
So as we go through the year, we all pick up steam, but don't lose sight. The other piece of this on the consumables is we want to get after the great offers on the private brands, which our customer sees great value versus national brands. We -- that's the same kind of effort we need there as much as we need on discretionary consumables. Within consumables, we can drive private brands.
Kelly Bania:
Okay. That's very helpful. And then maybe just a follow-up. Can you just provide a general update on turnover? And how that's trending at both banners and the DCs? And just how you feel about the compensation structures across the organization?
Michael Witynski:
Yes, thanks for your question. This is Mike. Our turnover at our retail stores is actually trending to be that we just finished up the best year we've had in the last several years at both banners, Family Dollar and Dollar Tree at the store manager ranks. And at our DC, we do have turnover. And we -- as we look at the competitive environment and the average hourly rate by markets, we are adjusting accordingly to mitigate that as much as possible.
Operator:
Our final question will come from Judah Frommer with Crédit Suisse.
Judah Frommer:
First, I just wanted to circle back on the tariffs and the $47 million impact in the first half of this year. I think we kind of felt like we were done once we got the $19 million disclosure for Q4. So what's changed? Is there more timing impact or have mitigation efforts? Are they not seeing the same results that they saw last year? And do you feel like the $47 million should be the end of it, if tariffs stay in place as they are today?
Kevin Wampler:
As it relates to $47 million, to your last part of your statement, yes, we do believe that if tariffs stay as they currently are that the incremental piece we're seeing is the last major incremental piece. It's always going to change based on the mix of products we select and bring to the marketplace.
I don't know -- from an overall standpoint, if the standpoint of $47 million additional this year, we have to remember a couple of things. One, at this point in time a year ago, Lists 1 through 3 were 10%. They're now at 25%. List 4A at 7.5% did not exist. So basically, that's what you're -- we're cycling against. And then in some instances, we've decided not to mitigate some of these just based upon the value perception of the product that we bring to the marketplace. So I think those are some of the things that play into that. But I -- to your point, this should be -- assuming that things -- the tariff rules stay as they are as we get through the first half, then it becomes more of an even playing field going forward.
Gary Philbin:
And Judah, I would just, [ for up to ], we continue to work on supply chain. It's not the easiest thing to lift up a supply chain from China to move somewhere else, but we have done it. And we've moved it to other Southeast Asian countries. We moved some back domestically. We move some to Mexico.
So that's part of what we do on every trip. So it is something that we have -- as long as we have visibility to it, we can make better choices on what we want to buy to. So stability will go a long way. But the $47 million is what we see because we still got inventory flowing through in Q1 at the higher 15% on 4A. The 7.5% didn't go into effect till Valentine. That's going to take a while to unwind. And then we'll have that product going through that wasn't in place last year. So I hope that gives you some color on it.
Judah Frommer:
Yes, that's really helpful. And then lastly, I was just hoping maybe you could help us with some color on top line trajectory kind of early in Q1. I think some other retailers that saw that squeezed during the shortened holiday period have given some color around kind of the bounce back in February. It seems like maybe that should be easier in Dollar Tree, given potentially promotions weighing down price in Family Dollar.
And then, anything you could call out on coronavirus-related demand or stock up at either banner in the last week or 2?
Gary Philbin:
Well, the -- I called out really I've always thought the efforts around our seasons are so important at Dollar Tree, which is why I called out Valentine's Day and a much better holiday this year, and we gotten out of the gates quickly and lots of love in the air. We sold over 10 million-plus balloons and cards. And so that all felt pretty darn good to us for Dollar Tree and been a good Valentine's at Family Dollar, which is a smaller department. But the bigger opportunity there was tax time, which I called out on some of the promotional activity.
We certainly are seeing a spike on anything that's related to hand sanitizers and cleaning surfaces. But I would say we're also in 1st of month right now in tax refund time. So right now there is money in the market for all those reasons, plus a heightened efforts for everyone to wash their hands and use hand sanitizer. So we're seeing that in the stores as well.
Operator:
Thank you. This concludes today's question-and-answer session. I will now turn the conference back over to Mr. Randy Guiler for closing remarks.
Randy Guiler:
Thank you, Britney, and 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 Q1 results is tentatively scheduled for Thursday, May 28, 2020. Thank you. Have a good day.
Operator:
This concludes today's call. Thank you for your participation. You may now disconnect.
Operator:
Good day, and welcome to Dollar Tree, Inc.'s third quarter earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Randy Guiler, Vice President, Investor Relations. Please go ahead, sir.
Randy Guiler:
Thank you, Aaron. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the third fiscal quarter of 2019. Participating on today's call will be our President and CEO, Gary Philbin; and our CFO, Kevin Wampler.
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 the most recent press release, most recent 8-K, 10-Q and annual report, 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. [Operator Instructions] Now I will turn the call over to Gary Philbin, Dollar Tree's President and Chief Executive Officer.
Gary Philbin:
Thanks, Randy. Good morning, everyone. The third quarter represent another period of solid sales performance for both brands, Dollar Tree and Family Dollar. Our store optimization efforts and sales driving initiatives are working. The teams have completed more than 1,150 Family Dollar H2 renovations, nearly 200 Dollar Tree rebanners and more than 1,000 Dollar Tree Snack Zones and launched our Dollar Tree Plus! test already this year. These efforts have driven top line sales and transaction counts at both banners.
Fiscal 2019 has been a unique year as a result of several factors. We planned and accomplished the material acceleration of our Family Dollar store optimization initiatives and the consolidation of our 2 support centers to Chesapeake, Virginia. Additionally, the global helium shortage, which has an outsized impact on our party business, and the continued uncertainty regarding trade and the related tariffs have impacted our business. I'm proud of our team's efforts and the sales execution through this environment. We worked hard to maintain focus on our customers and our values in store. Our results for the third quarter included sales increase of 3.7% to $5.75 billion. Consolidated same-store sales increase of 2.5%, and our EPS of $1.08 was within our guidance range. Other highlights for the quarter included completing 247 Family Dollar H2 renovations, completing 512 Dollar Tree Snack Zones, bringing our total to 2,087 across the chain, and repurchasing $11.6 million (sic) [ 125,048 ] shares as part of our share buyback program. And in mid-October, we hosted our fourth annual nationwide hiring event focused on hiring more than 25,000 associates in communities all across the country. This event provides individuals with the opportunity to join the Dollar Tree or Family Dollar teams. These new associates can earn the opportunity to be promoted through the field organization. As a growth company, we're always looking for talent and [ better ] strength that can develop into future leaders in our stores. Our application flow was strong for the successful hiring event. Regarding Dollar Tree segment sales highlights for the third quarter, we delivered a 2.8% comp, representing the 12th consecutive quarter of comps exceeding 2%. Dollar Tree had increases in both traffic and ticket, with traffic slightly outpacing the ticket increase. Geographically, all zones comped positively and were at or better than 2%. Strongest performing zones were in the Northeast, the upper Midwest and Southwest. Our cadence of comps in the quarter, all 3 months, were better than 2%, with August being the strongest month. Dollar Tree continues to deliver solid positive comps in the consumables category. And our seasonal business continued to perform very well. In fact, Halloween was on par with a very good seasonal sell-through we've been experiencing over the past couple of years. Our variety business, which includes party at Dollar Tree, comped positive each month during the quarter, but was again impacted by the helium shortage. We estimate that our comp was negatively impacted from lost balloon sales by about 20 basis points. We expect this helium shortage headwind to continue, but to a lesser degree, for the remainder of 2019. The Dollar Tree merchant team continued to do a terrific job of delivering ever-changing and new product ideas that drive customer excitement and repeat visits. Dollar Tree WOW is the excitement that our customers have come to expect. Snack Zones have started, 27 we have rolled out to great success, and we continue to extend this initiative into more Dollar Tree stores. Last year, we added Hallmark cards to all stores across the chain. It has proven to be a great partnership, and customers certainly love the Hallmark brand, the offering and the value. And this year, we've been rolling out a new program called Crafters Square. Crafters Square is now in more than 600 Dollar Tree stores and is our new and expanded selection of arts and crafts supplies, all priced at $1. Feedback from stores and customers has been fantastic, and we'll continue to expand this traffic-driving initiative to more stores going forward. The sharing of projects within the crafting community on Pinterest, Instagram and other platforms has made this one of the quickest launches to our customers on a small base of only 600 stores. Let me give you an update on Dollar Tree Plus! As we've discussed previously, we are conducting a test of multi-price points at select Dollar Tree stores. The multi-price points -- multi-price assortment is an increment of $2, $3, $4 and $5, is being tested in 115 stores. We just reached the 6-month mark in the initial stores, as the majority of the test stores were added in June. And we're closely monitoring performance, including impacts to traffic, sales, margin and, of course, customer feedback. As always with tests, we follow an iterative process where we test, learn, modify and improve along the way. Our focus regarding multi-price point tests as we finish this year and move into 2020 will be on delivering great values to our shoppers within targeted categories, shifting more towards discretionary and unique products that we believe delivers the WOW factor to consumers and is additive to the basket and margin profile. Utilizing our broad vendor base to source these great value products, ensuring, as always, that we protect the Dollar Tree brand. Our brand is more than the items we sell for $1. The Dollar Tree brand represents a pricing value and that the customers get tremendous value for what they spend at Dollar Tree. Our efforts to drive this test should include extending our reach by adding great value, exciting merchandise and opportunities to expand margin. We are still early in this test and look forward to updating you as the test evolves. Family Dollar team delivered another quarter of positive comps with a 2.3% increase. Importantly, comparable transaction count for the quarter was positive, continuing the trend that began to emerge in midsummer. Team's performance demonstrates that efforts to prove the consistency of execution across the chain and efforts to drive H2 performance are working and are gaining traction. Our Family Dollar segment highlights for the third quarter. Our consumables business performed very well, delivering its 12th consecutive quarter of positive same-store sales. Our cadence of comps through the quarter, all 3 months, were better than 1.5%, with August being the strongest month. From a zone perspective, comps for 6 of our 7 zones were positive, with the strongest performance in the West, Southwest and Southeast zones. Our Family Dollar customer service scores for Q3 showed improvement from the prior year. Categories of store cleanliness, product assortment, speed of checkout were among the notable improvements. We continue to believe we are taking the right steps to transform our customer experience to increase the frequency of the business. These steps include improving customer satisfaction, developing brand and price reputation, focusing on opening price points, incorporating better organized and focused Dollar impact sections and serving more of what our customers need, including frozen foods. And as we expected, the average scores for H2 stores, where we have invested in our fleet, are higher across the board. We continue to be very pleased with the performance of our H2 store format of Family Dollar. All new and remodeled stores are in this format, which is driving greater loyalty, repeat visits and value perception in these locations. These renovated stores continue on average to deliver a comp greater than 10% in their first year post renovation. We are committed to this format and plan to renovate at least 1,000 Family Dollar stores to the H2 format in fiscal 2020. We began rolling out the H2 format in Q3 last year. We continue to like the sales that we are seeing in the H2 stores, now cycling into their second year. Our efforts to drive performance across the store base continue to focus on initiatives around our private brands with compare and save, our smart coupons that offer our loyal customers the latest and best values. Hallmark cards will be coming to all Family Dollar stores in 2020. And of course, our store manager training and retention efforts, as always, to drive performance and consistency store by store. In our store support center, we are seeing the benefits of having our teams, Dollar Tree and Family Dollar, together in one location. We anticipate being together will greatly enhance our culture, our ability to recruit great talent and improve the collaboration within our organization as we train and develop and provide even more and better support for our stores.
Looking at real estate for both segments in the third quarter. We opened a total of 165 new stores, 114 Dollar Trees, 2 in Canada and 51 Family Dollars. We relocated or expanded 12 Dollar Tree and 3 Family Dollar stores. We renovated 247 Family Dollars as a part of our H2 renovation initiative, and we rebannered 39 Family Dollars to Dollar Tree stores for a total of 463 projects during the quarter. We also added freezers and coolers into 138 Dollar Tree stores, bringing our total to stores with freezers and coolers to just over 6,000. During the quarter, we closed 42 stores, 12 Dollar Trees and 30 Family Dollars, and we ended the quarter with 15,262 stores:
7,447 Dollar Trees, 7,815 Family Dollars.
Before I turn the call over to Kevin, I'd like to provide a brief update on tariffs. Just prior to our last earnings announcement in August, the USTR announced that tariffs on List 1, 2 and 3 products will increase from 25% to 30% on October 1. Tariffs on List 4A products would increase from 10% to 15% on September 1, and tariffs on 4B products would increase also from 10% to 15% on December 15. As noted in our August earnings announcement, our outlook provided at that time did not include any impacts related to these changes. Our updated outlook includes approximately $19 million of cost of goods sold, with the expected impact from USTR tariffs for List 1, 2 and 3 as well as List 4A and 4B tariffs, if fully implemented, in Q4. Nearly all the expected impact is related to the introduction of List 4A tariffs. Now I'll turn the call over to Kevin.
Kevin Wampler:
Thanks, Gary, and good morning. Consolidated net sales for the third quarter increased 3.7% to $5.75 billion, comprised of $3.07 billion at Dollar Tree and $2.67 billion at Family Dollar. Enterprise same-store sales increased 2.5%. On a segment basis, same-store sales for Dollar Tree increased 2.8% and for Family Dollar, increased 2.3%. Overall, gross profit was $1.7 billion compared to $1.67 billion in the prior year's quarter. Gross margin was 29.7% of sales compared to 30.2% in Q3 of 2018. Gross profit margin for the Dollar Tree segment decreased 60 basis points to 34.2% when compared to the prior year's quarter. Factors impacting the segment's gross margin performance for the quarter included merchandise costs, including freight, increased approximately 55 basis points, primarily due to higher freight costs. And distribution costs increased approximately 10 basis points, primarily due to higher payroll costs and depreciation.
Gross profit margin for the Family Dollar segment was 24.5% during the third quarter compared with 25.3% in the comparable prior year period. The year-over-year decline was due to the following:
Merchandise costs, including freight, increased approximately 30 basis points, driven primarily by an increase in freight costs and higher sales of lower-margin consumable merchandise, partially offset by improved initial mark on. Shrink increased approximately 15 basis points resulting from unfavorable physical inventory results in the quarter. Distribution costs increased approximately 15 basis points due to increased payroll costs at the DCs. Occupancy costs increased approximately 10 basis points due to an increase in real estate taxes; and markdown expense increased approximately 5 basis points, resulting from higher clearance activity in the quarter.
Consolidated selling, general and administrative expenses as a percentage of net sales in the quarter increased 30 basis points to 23.5% from 23.2% in the same quarter last year. For the third quarter, the SG&A rate for the Dollar Tree segment as a percentage of sales increased to 22.1% compared to 22% for the third quarter of 2018. The increase was due to store operating costs increased by approximately 15 basis points resulting from increased debit and credit card fee penetration and an increase in loss on disposal of fixed assets from an earlier lease termination in the quarter. Payroll costs decreased approximately 5 basis points, primarily due to lower retirement plan expenses and lower insurance benefit expenses compared to prior year quarter, partially offset by an increase in store hourly payroll due to higher average hourly rates and an additional hours to support store initiatives. SG&A expenses for the Family Dollar segment were 22.5% of sales in the third quarter compared to 22.2% of sales for the same period last year. The increase in SG&A as a percentage of sales was due to the -- of the following. Operating expenses increased approximately 25 basis points, resulting primarily from higher costs related to the disposal of fixed assets in connection with our store optimization initiative. Depreciation and amortization expense increased approximately 10 basis points as a result of the capital investment required to support the H2 initiative. Corporate and support expenses increased 10 basis points, primarily related to store support center consolidation costs and higher depreciation. This included approximately $4 million of expenses related to the Q3 2019 discrete costs associated with our store support center consolidation. For the quarter, the company incurred approximately $9 million in total discrete costs, which was consistent with our guidance. On a consolidated basis, operating income was $358.4 million compared with $387.8 million in the same period last year, and operating income margin of 6.2% of sales compared to 7% of sales in last year's third quarter. Nonoperating expenses for the quarter totaled $41.5 million, which was comprised primarily of net interest expense. Our effective tax rate for the quarter was 19.3% compared to 17.1% in the prior year's third quarter. The prior year quarter benefited by $15.7 million based on the company's substantial completion of our analysis of the Tax Cuts and Jobs Act on the net deferred tax liability valuation. The current year tax rate reflects the benefit of statute expirations and the reconciliation of the tax provision to the tax returns. For the third quarter, the company had net income of $255.8 million or $1.08 per diluted share as compared to net income of $281.8 million or $1.18 per diluted share in the prior year quarter. Combined cash and cash equivalents at quarter end totaled $433.7 million compared to $422.1 million at the end of fiscal 2018. Our outstanding debt as of November 2 was approximately $4.3 billion. During the third quarter, we repurchased approximately 125,000 shares for $11.6 million. At quarter end, we had $800 million remaining on our share repurchase authorization. We'll provide updates on additional share repurchases, if any, following the quarter in which they may occur. Inventory for the Dollar Tree segment at quarter end increased 14.4% from the same time last year, while selling square footage increased 7.5%. Inventory per selling square foot increased 6.4%. Our inventory levels reflect the early receipt of imports to mitigate tariffs. We believe that current inventory levels are appropriate to support the scheduled new store openings and our sales initiatives for the remainder of the year. Inventory for the Family Dollar segment at quarter end decreased 4.2% from the same period last year and increased 0.9% on a selling square foot basis. Based on store closures, the Family Dollar segment has 5.1% less square footage outstanding. Capital expenditures were $279.8 million in the third quarter versus $228.4 million in the third quarter of last year. And for fiscal 2019, we are planning for consolidated capital expenditures to be approximately $1 billion, consistent with our initial outlook. Depreciation and amortization totaled $160 million for the third quarter and $150.5 million in the third quarter last year. For fiscal 2019, we expect consolidated depreciation and amortization to be approximately $635 million. We've updated our outlook for fiscal 2019 and have lowered our guidance for Q4 based on the following expected effects. With regard to tariffs and USTR announcement, we estimate that Section 301 tariffs will increase our cost of goods sold by approximately $19 million or $0.06 per diluted share in the fourth quarter if the tariffs are fully implemented. Almost all other costs are due to List 4A as its timing did not allow for significant mitigation. We expect additional pressure on merchandise margins based on lower-margin consumables growing faster than originally forecasted. We expect distribution costs to be higher than originally forecasted, primarily due to payroll cost pressures from higher turnover, which may affect productivity. Expenses related to repairs and maintenance, utilities and depreciation are now expected to have a higher run rate than originally forecast. Additional assumptions in our outlook are the calendar considerations for the remainder of the year, which is that there will be 6 fewer selling days between Thanksgiving and Christmas, which will negatively impact Q4 sales. We expect continued pressure on store payroll based on competitive markets, states increasing minimum wages, unemployment levels and completing the company's initiative plans, including H2 renovations and Snack Zones. We estimate year-over-year domestic freight cost as a percentage of sales to be slightly lower in the fourth quarter. Import freight rates, as we noted on last quarter's call, will increase based on our April rate negotiations and beginning in January 2020, as a result of low sulfur fuel requirements for ships. Net interest expense will be approximately $41.9 million in Q4. We cannot predict future currency fluctuations. We have not adjusted our outlook for currency rate changes. As always, our outlook assumes no additional share repurchases. Our outlook assumes a tax rate of 22.3% for the fourth quarter and 21.4% for fiscal 2019. Weighted average diluted share counts are assumed to be 237.7 million shares for Q4 and 238.2 million shares for the full year. For the fourth quarter, we are forecasting total sales to range from $6.33 billion to $6.44 billion in diluted earnings per share in the range of $1.70 to $1.80. These estimates are based on a low single-digit increase in same-store sales and year-over-year square footage growth of 1.1%. For fiscal 2019, we are now forecasting total sales to range between $23.62 billion and $23.74 billion based on a low single-digit same-store sales increase of approximately 1.1% selling square footage growth. Company anticipates GAAP net income per diluted share for the full fiscal 2019 will range between $4.66 and $4.76, which includes a discrete cost of approximately $85 million or $0.28 per diluted share, approximately $15 million or $0.05 per diluted share of store closure-related costs and approximately $19 million or $0.06 per diluted share related to tariffs. I will now turn the call back over to Gary.
Gary Philbin:
Thanks, Kevin. Like I mentioned at the beginning of the call, 2019 has been a year of distinct opportunities. We planned and executed the material acceleration of our Family Dollar store optimization initiatives, snack Zone resets at more than 1,000 Dollar Tree stores and the consolidation of our 2 banners to our store support center in Southeast Virginia. We accomplished this against the backdrop of the helium shortage, the uncertainty regarding trade and related tariffs, continued impact of freight costs and DC costs affected by the increasing starting wage rates. I'm proud of the sales results at both Dollar Tree and Family Dollar that were accomplished in the quarter. This was done in the first 3 quarters of the year with more than 2,000 stores disrupted from our initiatives. We invested in our stores, our starting rates in specific markets and have our fleet of stores ready for the fourth quarter and the key holidays.
As stated in today's press release, we also announced that we will do at least another 1,000 H2 renovations in 2020. Our confidence in this model grows as we have more across our fleet of stores and various types of settings, demographics and densities of population. We will announce our new RILA and other store level capital plans for 2020 at the end of Q4. The impact on our gross margin in specific areas is ours to control and do better. We are focused on making improvements across several categories as we finish the year and start 2020. These areas include improving our shrink results, enhancing efficiencies within our supply chain to better manage freight costs, driving sales on the discretionary side of our business to reduce mix headwinds to margin, and tariff mitigation efforts. For shrink, our plans are focused on enhancing allocations and right-size inventories to all of our stores, especially those with a high shrink history; continued focus on training throughout our field leadership, districts and store teams; adding loss prevention tools within our stores; and last week, we're pleased to bring on seasoned, experienced retail executive in a senior VP role to lead both our Dollar Tree and Family Dollar asset protection teams. The asset protection teams from both banners will report to him effective immediately, and our visibility to market issues, external and internal, will be enhanced with the combined teams in priority high shrink markets. Our opportunities across our supply chain and freight costs are focused on optimizing our less than truckload inbound costs, fitting our key freight lanes, continuing to reward our best carriers by [ building ] that deliver on cost and service and getting back to our historical backhaul levels. On the discretionary side, at Dollar Tree, we are working hard to overcome our helium shortage with more party-centered items to service our customers. For Family Dollar, we like what H2 has done for the top line and transactions, focusing specifically around the impact on driving more discretionary within our stores. This includes our WOW tables, our dollar impact sections and the queuing assortment at checkout. We still have more runway for all of these discretionary sales in these areas. We're building on important categories that are doing well, especially around mom with kids across a combination of all things needed for young kids, including infant apparel and baby needs. Enhancing our party footprint with the addition of Hallmark-branded cards and Family Dollar through the first half of 2020. For tariff mitigation, we are planning to continue efforts to mitigate ongoing and potential new levels of tariffs as we head into 2020. These efforts include the continued support of many vendors to lower costs, the redesign of product or packaging, efforts to shift mix between higher and lower cost products, awarding volume from multiple vendors to our most competitive suppliers, moving product out of China to affect lower landed cost of goods and our combined teams' purchasing power throughout all of Asia. And as always, finding new vendors domestically and in other countries to develop the new and exciting values that our customers have come to expect. We are in the planning stages for 2020, and we'll provide details related to 2020 outlook on our fourth quarter earnings call. I believe our store teams are well prepared for the holiday season. I would like to sincerely thank each of our associates as we head into the fourth quarter and holiday season. More than 15,000 stores across the U.S. and Canada, our network of 25 distribution centers and, of course, our store support center in Virginia. Thank all of them for their commitment, dedication and efforts to deliver value and convenience to our shoppers each and every day. Finally, we continue to focus and make meaningful progress to grow and improve our business for both brands. We are well-positioned in the most attractive sector of retail to deliver continued growth and increased value for our shareholders. The combination of more than 15,000 Dollar Tree and Family Dollar stores provides us the opportunity to serve more customers in all types of markets. The combination of 2 great brands provides great flexibility in managing our future growth. Operator, we're now ready to take questions.
Operator:
[Operator Instructions] We'll go first to Scot Ciccarelli with RBC Capital Markets.
Scot Ciccarelli:
Can you talk about the margin profile on the remodeled Family Dollar stores? And related to that, given the mix that you have in those remodeled stores, which is much more consumable based. Is there a reason to believe gross margins can improve on a go-forward basis? Or is that higher mix of consumables in these stores effectively reset the gross margin profile for Family Dollar?
Gary Philbin:
Scot, this is Gary. We're pleased with H2 because when we went into this, we knew we were adding in more frozen food doors and some more food that obviously has an impact on margin. But we also went into it with the thought of let's offset that with some of what we do on immediate consumption, the queuing lines, the WOW tables. I just think some better adjacencies to run the store. Early on, we saw some degradation in margin. But as we sit here now, H2 is neutral to the fleet, but we didn't do this to be neutral. I really -- our goal here is to have margin expansion within H2. So we're on the right path. We've got traffic going in these stores. And obviously, you've heard us call out that comp. Our next workflow is maintain all that and add margin expansion to H2. We like everything that the customers are telling us about it. We like the results on the top line and sales, and we got to get going on the margin mix now.
Scot Ciccarelli:
And what kind of -- on a go-forward basis, Gary, that's helpful. But what kind of margin improvement do you think is realistic if we're looking out over the next, I don't know, 4 to 8 quarters? Because, I mean, we've seen several hundred basis points of gross margin degradation in that business, and I guess I just kind of keep coming back to the question, do we have a true reset here? Or is that something once we establish the better top line, we can kind of dig our way out?
Gary Philbin:
Well, I've always said we need to get to an inflection point on the fleet. We were rebuilding the stores, basically one store at a time with H2. We did over 1,000 in the first 3 quarters this year. We're planning on doing 1,000 next year. I need the top line sales. I think that's what H2 has given us. The work on the margin, Q3 for Family Dollar, I think it was about an 80 points difference year-over-year comparison. The expansion that can rise across the whole fleet are some of the things I talked about. We got to focus on the discretionary seasonal apparel, electronics. All those are the categories that I think get teed up in the right way in H2. It doesn't mean that the rest of the fleet can't benefit from some of the same elements and efforts across the fleet. So we're putting together our '20 plan with specific initiatives around those discretionary categories to drive the -- maybe get the same benefit that we've really seen on the consumables side. We've got more folks coming through the front door here. And that is as important as anything that we do and now I got to get them over to the other side of the store to buy more of the discretionary product. That's doable. More to come when we announced our 2020 plan.
Operator:
We'll go next to Michael Lasser with UBS.
Michael Lasser:
So at what point do you think you'll have a reasonable level of visibility into the business? The factors that you mentioned outside of tariff that contributed to your 10% to 15% decline, the reduction in your 4Q guidance, including mix, payroll pressures at the DCs and increased run rate for repairs and maintenance, utilities and depreciation should have been somewhat known and not really surprising. So is it -- once you get past this, then as we get into the first part of next year, you feel confident you have a level of visibility into the profitability of this business? Or is it going to take longer than that?
Kevin Wampler:
Michael, it's Kevin. I think as we look at it, the items we called out, obviously, the shift in mix as we've seen the -- basically, the consumable business outpaced even what we had forecasted. And really, that's in both brands, more so in the Family Dollar brand and the Dollar Tree brand, but it's in both brands. So the Dollar Tree brand, we've got some good things going with frozen food, refrigerated and in center aisle as well. So a lot of things going on there. And again, a little bit of overall effect from the helium shortage and the halo effect to the party department in general.
On the Family Dollar side, obviously we haven't seen the discretionary business kick in, as well as we'd like it to, Gary, what he was just speaking to. A lot of opportunity there, getting customers in the door is key, obviously, and getting the foot traffic and having that opportunity to sell them that discretionary item is very, very important. I think as we obviously look at other pieces of the business, obviously, we called out DC costs. Really, this is not an area we've called out in the past so much. It's really been more of a -- more -- a bigger topic as of late as we've gone into the, what we would call our seasonal peak here in the end of Q3 and beginning of Q4 as we look at basically getting all the merchandise through these buildings. And with unemployment where it's at, it's obviously required us to bring up basically starting wages and making sure we can engage with those associates and train them appropriately.
Gary Philbin:
Michael, Gary. I would just add this. Keep in mind, this was a year that was everything we talked about at the beginning of the year. The store initiatives, 2,000 stores at various times torn up. Keep in mind, at the DC level, we were also not just shifting rebanners back and forth, we are also shifting product back and forth, especially with the impact of our Dollar sections in some of our WOW items. So along the way, we combined a store support center, too. With all those balls in the air, I give credit to our store teams and our store support teams to get that done. Everything we're talking about here gives us the consistency, visibility as we go forward in '20. We have done all this, really, with major initiatives, both in our store base, in our store support center. So listen, the things that we're focused on are the right things to drive the business. And with all that going on, we drove sales throughout the year. And with H2 stores, building momentum throughout the year, I'm really pleased with where we will end up on the top line and the initiatives around the margin piece, we got to get after on each of them.
Michael Lasser:
Totally reasonable, Gary. It just seems like investors want some time frame on when they can hold you accountable to an improvement in profitability and better visibility because there have been a lot of disappointment over the last few years and having some sense of when that might turn would be helpful to the investment community. And as part of that, are you still committed to the 14% to 18% EPS growth off your original GAAP guidance that you provided earlier -- in the year for 2020? And why would that no longer be the case?
Kevin Wampler:
Michael, as we said before, that was at a point in time with what we knew at that point in time. Obviously, we're working through and finishing up our 2020 plans. Obviously, the biggest unknown as we sit here today for us and many other retailers is tariffs and where does that land at the end of the day. So obviously, we're committed to improving our business and improving on the many things we've talked about already this morning, but whether -- we'll give, obviously, guidance when we get to our fourth quarter call. And hopefully, we'll have some clarity around all those things.
Operator:
We'll go next to Paul Trussell with Deutsche Bank.
Paul Trussell:
I know you give guidance on a consolidated basis. But to the extent possible, could you give maybe a little bit more detail regarding your expectations per banner, as we think about comps and gross margin and SG&A into fourth quarter? And then as a follow-up, just bigger picture for Dollar Tree. Margins look like they're going to be down this year. And just curious if you can walk through what some of those -- what you view as more temporary in nature as we kind of turn the page into 2020? Is this a business that you believe can get back to expanding margins?
Kevin Wampler:
Paul, this is Kevin. I think as we look at it, again, we don't give guidance by banner. Obviously, when you look at it from a -- what I can give you a little feel for, for Q4, is, if you look at the guidance we gave today and you can back into a range of operating income based on all the data we've given you. And I would tell you that it's basically a little -- right around 9% or just above. If you compare that to prior year, excluding the items such as the markdowns for aged goods, clearance of inventory and in-store impairment, I would tell you that the pressure between basically gross profit and SG&A is fairly consistent. So we're seeing pressure on both line items. So that just gives you some directional ability to think about that.
I think as we look at this year and as we look at obviously the fourth quarter, fourth quarter is a big quarter for Dollar Tree from a seasonal perspective. So we get a pretty good boost in sales just from a seasonal set, which obviously has always provided us the ability to basically provide a good gross margin. And I don't see that in there. But our seasonal set this year performed very well. We had a very good Halloween set. We had a very good performance with our Halloween seasonal, and we feel good about going into the fourth quarter with our Christmas set. So I think that always bodes well. Obviously, we do have the 6 less selling days, but that doesn't mean we're not going to try to make sure we do everything we can to get every last sales dollar that we can at the end of the day.
Gary Philbin:
Paul, this is Gary. Let me sort of answer your question. What's temporary and start with Dollar Tree. The things that have we've been chasing this year start with shrink. It's a both banner issue. But shrink is something I have an expectation that we're going to do better on next year. We're coming off of a second year of not great performance, and we can do better. I think the freight piece, we started talking about it last year was certainly a bigger impact in the first half. We're going to see some of that modify in the second half, but we're still significantly up year-over-year.
And the distribution costs, I think, listen, I don't know if it's temporary or not. I know that it impacts us when we have more folks coming into a DC. And it's really not even what you had to pay for us again the DC. It's almost the productivity that you lose in the DC because you've got new folks that you got to train and retain. Those are the things that I think were the one-offs for both banners that I would expect us to make improvement on in the initiatives we talk about. The mix on product, to me, is a bigger issue at Family Dollar than it is at Dollar Tree. We are happy with what H2 has done. But across 2019, we've worked hard on keeping sales going. And we just got to find some of the same elements that drive customer traffic into those sections as they do on the consumables. For Dollar Tree, I don't know how to think about tariffs. But it's always just going to be about incorporating the next WOW into the stores. We'd like what Snack zone has done for a little pressure on mix. That's why we got Crafters Square going. A year before that, we started out in Snack Zone, but we put in the Hallmark. So it's always what we push and pull to drive customers on both foot traffic and sales and margin. We're going to do that again as we go into '20. So those are going to be the pieces that we talk about category by category. Hope that's helpful.
Operator:
We'll go next to Peter Keith with Piper Jaffray.
Peter Keith:
So I want to look at the tariff impact. Certainly, it's a very volatile situation with a lot of unknown changes. It sounds like, though, the impact to Q4 is really just because of the timing with 4A implemented, you didn't have time to adjust. Are you still confident as you look at the 2020 that you think will be able to mitigate most of the List 3 and List 4 tariff pressures?
Gary Philbin:
Peter, this is Gary. Yes. List 1, 2 and 3, I think the teams have been through a couple of cycles now of working with our vendors to either at lower cost or redesign packaging, so we can land it. And in some cases, we're moving outside of China, as you've heard us talk about. And even on this last trip, as we are buying already fall and Halloween next year, we've moved additional product out of China. So you're not going to be able to pick up that entire supply chain. But that's where we do sometimes, item by item, vendor by vendor, as we see those opportunities.
As we go into 4A and 4B, it's more of our product. And as always, I want to go into 2020, I think, with some compelling product, and we're going to do the smart things around what we have to do to do the best we can to mitigate. I've also told our merchant teams, at the end of the day, I want to be able to see what it is. We might be changing or the opportunity to move price away from a vendor to another country before we do it. So 4A, what we've seen is when it gets announced and we don't have much time to mitigate, that's what we're calling out with the Q4 impact. Going forward, when we get a chance to get on our regular cycle buy and meet with our vendors, yes, we can mitigate more of it. I just don't have a full vision of that until we go on a big buying trip in January, which will be our first time really to meet with all of our vendors. And I'm assuming at that point, 4B is in effect as well.
Peter Keith:
Okay. And then just on the discussion of mix, particularly with the H2 remodels, one thing I'm trying to get my head around is, it would seem that with the increase of $1 items that you would be experiencing greater buying scale with similar items from Dollar Tree and Family Dollar. So it does seem to me that, at least from the outside, that there would be some benefits to mix from $1 item. So are we misreading that? Or is it just that the discretionary weakness is overarching negative on the business.
Gary Philbin:
No. Well, you heard me talk a little bit about an H2 4-wall margin is about neutral to the fleet, and so that the overall mix change that we're experiencing is no different at H2. What's different is that we invested heavily with more of our lower-margin frozen food and additional expansion of some key categories in center of the store food as well. That's lower margin. That's been offset, you're exactly right, with the impact of the dollar sections, with the queuing assortment, with Dollar WOW tables, with immediate consumption.
So the fact that we're back to fleet neutral margin, I think, shows the power of some of those sections we just got hampered up another level to get margin accretion going in H2 stores. So the way I look at with the team, we almost take a look at, here's the sections we've invested in, what's our sales and margin on a frozen food category and is that being offset with some of those other sections. And that's pretty much what we're seeing right now.
Operator:
We'll take our next question from Joseph Feldman with Telsey.
Joseph Feldman:
I just wanted to get a little more understanding of like the higher price point cash. And how are people responding to that so far?
Gary Philbin:
I would say, as folks come in, I would say it's 1/3 folks have seen the product and buy it, 1/3 of our loyal customers have commented that they don't like the multi price go in our stores and 1/3 are somewhere in the middle. Here's my view from everything we've interviewed our customers with. It's not -- so far, we've had a priority on more consumables, which I think were an item that we want to just get out there across categories.
The next phase of the test is more about what I would call the Dollar Tree WOW side of it. We went over on our buying trip this July to buy specific categories. So I would call them more on our variety, discretionary side, things that people haven't seen. And we'll see how customers respond. But I think that's more to what our customers are going to enjoy seeing incredible values on and allow us into our Dollar Tree WOW umbrella to say, "that's a great item I don't see anywhere else. And I know that costs more when I do see it." And I think that's going to be what we push on into some of this showing up in stores now, but into 2020. So when we get a chance to test and learn and put new products in, especially when we can design them and import them or find discretionary items domestically, I just think that's going to be the next phase of the test that gives us another important data point. Our customers that buy it tend to buy more than the average Dollar Tree transaction, but I go back to what success, and success in this is really to increase the reach of Dollar Tree to another segment of customers, another chance to increase margin as well, and as always, protect the brand to say this is the WOW factor at Dollar Tree. So those are the things that are in the mix. I think we have some exciting product coming in, and we stay close to watching that week by week.
Joseph Feldman:
And then one follow-up. I know you outlined a couple of efforts on the freight side that you can do like optimize LTL and back to historical backhaul levels. Like how challenging a project is that to improve the freight side? Like, is that something that we can see happen pretty quickly into next year?
Gary Philbin:
Well, we are seeing some modest year-over-year declines right now with it. And the things that we're doing, we're in control. But we need to bid out the process. Now somebody has to sign up for the lower bid and give us great service, both on inbound and outbound, to get those rates. So I'd like to think that it's something that as we read some of the same headlines, we are not in the same position as the truck driver shortage exactly at this time a year ago. I think that bodes well for us. The opportunity when we get better service on the outbound, allows us to do more backhauls. So we're going to go into 2020, pushing all the levers we know to do to get both lower freight and better service, and we'll understand better once our important third-party suppliers and independent truckers continue to give us service as we expect to as we finish out Q4 into 2020.
Operator:
Ladies and gentlemen, due to time constraints, we have time for just a couple more questions. We'll go next to John Heinbockel with Guggenheim Securities.
John Heinbockel:
Gary, curious when you think about the real estate composition of the 1,000 remodels you're going to do with Family Dollar this year -- this coming year, how will that be different than this past year? Is there a desire to maybe cluster more? And if you do cluster more, can that lift be brand perception at non-remodeled stores, if you do that?
Gary Philbin:
Well, we do take a look where is the number of stores. We went into this knowing that we want to fix some of the oldest stores in the fleet. So based on the last year talks, we went into with the best opportunity based on volume. We did need a certain size. And really, what we're skating to is, by the time we face these next 1,000, we ought to be close to 40% of our fleet or a little better, being less than 5 years old. And I think to your point, that does give our customer give a perception of what they've seen at Family Dollar. So it's not necessarily that everything has to be H2. We've got some great stores out there that are not, but we are changing the face of what the customer sees with this store initiative, along with what we closed, along with what we rebannered to Dollar Tree. So the combination of all those things gets us closer to an inflection point, which is I think what you're talking about, what does that customer see. And inside the store, the consistency around store standards, conditions and stocks are important across all the factors of the different stores that we run. So that's what we're aiming for. And as we get more and more stores with the same opportunity, we're still measuring it what's our biggest return on capital as we go and invest in these stores. But I think just by the nature of our fleet with where we are across the country, we're starting to get some critical mass into some key geographies.
John Heinbockel:
And then lastly, when you look at the private brand penetration opportunity, recognizing it's all consumable at FDO. But is that another 500 basis point penetration opportunities or much bigger than that? Where do you think that shakes out?
Gary Philbin:
Well, we've already said, we're in the low 20s as a brand, which is pretty darn good. I mean, it's not grocery store-esque because we're not a grocery store. But I think across the categories, what I would like to see is something closer to 100 basis point improvement consecutively over a number of years. I think that's the opportunity in front of us. And I think it speaks to, one, having great product and values in store. And number two, our customer just needs it because she's stretching her budget and the commitment on what we compare and save to national brands, I think, fits in our wheelhouse. I think the magic to it, as always, is introducing customers because they'll step up to private brands on something that first is something that they try on because it's a detergent, and then they'll go to HPA products, and then we'll go to food products. And the team has done a wonderful job on rebranding across the different categories. And I think that's opportunity still with runway to it.
Operator:
We'll go next to Karen Short with Barclays.
Karen Short:
Just one clarification question on tariffs and a bigger picture question. In terms of the $19 million, is it still fair to think of that split kind of 70% Dollar Tree and 30% Family Dollar in terms of the impact? I think that was the original split you gave back a couple of quarters ago.
Kevin Wampler:
Karen, the -- as you look at the $19 million, it's more skewed to Dollar Tree than the 70%. So the vast majority really relates to Dollar Tree. A small piece of it does relate to Family Dollar.
Karen Short:
Okay. And then, I guess, just in terms of Family Dollar 2.0, I guess, I'm wondering if you could give a little color on what its second year sales lift is? I know it's still early days, but any color there? And I guess, maybe a little color on why you think it's -- you're having more challenges in terms of getting good discretionary spend in those stores?
Gary Philbin:
I would say, when we think -- let me answer the second question first. It's still a customer that comes in and I think is responding to what we've done. I mean you just buy consumables on a weekly basis. The discretionary is tied sometimes to the seasons, but more times when I have for our customer, a little more jingle in our pocket across those discretionary categories. So it's a piece of -- always, we got to have the right values in front of our customer, across each of the categories. So maybe a part of this, Karen, I would even say, as we went in just knowing 2,000 stores are going to be disrupted, 1,000 plus at Family Dollar, we went into this year saying this is not the year to not have foot traffic coming in. H2 has been giving that to us. We've been hitting the gas. It's not just been H2 that's driving the comp.
So all boats have been rising. I think that was important with knowing we were going to have the down stroke on the store initiative going into it. So I think we just had some better compelling values in front of the customer on the consumable side. And not that we didn't give all the thoughts to how we laid out the store, but I think we got to get back to the basics of blocking and tackling on the discretionary side. What was your other piece of the question?
Karen Short:
Year 2, H2 comp.
Gary Philbin:
We're early -- I mean, yes, we like the comps. I'd like to -- as we get more stores into this, I mean we just finished up 1,100-change of H2. That profile is -- has stayed consistent with the addition of more stores across geographies, across densification of population. So we do like that. I think as we get into the second year here, it's -- the stores are still cycling some of their grand opening activities from last year. So more to come as we get more stores into that bucket.
Karen Short:
Okay. Can I just have one more question regarding Dollar Tree banner?
Gary Philbin:
Sure.
Karen Short:
Is there any variation in terms of the various stores on urban versus suburban versus rural? I mean you kind of gave that 1/3, 1/3, 1/3 comment in terms of the customer response. But is there any pattern on any of those markets in particular?
Gary Philbin:
For Dollar Tree?
Karen Short:
Yes.
Gary Philbin:
Or Dollar Tree Plus!? No, I would say -- I can't tell you there's a nuance here that really says there's much of a difference. I think it's more about the product, Karen, than anything else at this point.
Operator:
And ladies and gentlemen, we'll take our final question today from Matthew Boss with JPMorgan.
Matthew Boss:
So Gary, maybe larger picture, how would you assess the health of the low-income consumer today? Any changes to the competitive landscape that you've seen impacting any of your strategies? Or is it best to just think primarily that this is company-specific execution here?
Gary Philbin:
Well, listen, we've been building -- rebuilding our execution and rebuilding our banner. So I think that speaks to satisfying this customer. I think that's what H2 calls out that when we get a shopping environment that's compelling, exciting and has the items they want, they will respond to it.
To answer your question on the customer, listen, I think unemployment's at an all-time low. I think folks in general can find a job these days. I think the opportunity is still, oftentimes, they're one doctor bill or one car repair bill away from not being in such good shape. And that's really our opportunity to make sure that we have the right items to help them navigate a budget from beginning of the month to the end of the month. So I would say things are maybe slightly better because of jobs. But I never like to stray too far from a customer that is keenly focused on value, convenience, and that's the crosshairs of our Family Dollar ought to just win the customer with everything that we've been talking about, with H2 and the entire fleet.
Matthew Boss:
Great. And then, Kevin, maybe just a follow-up on gross margin. At the Dollar Tree banner, so this is the second straight quarter of 55 basis points merchandise costs headwind net of freight and 10 basis points of distribution pressure. How do these 2 items specifically shape up in the fourth quarter? And then do you still view 35% of the structural multiyear gross margin for the Dollar Tree concept?
Kevin Wampler:
I think as we look at it, as we've said, we look at freight in fourth quarter, we said domestic, we feel like we're headed in a little bit better direction could be flat to slightly down year-over-year. So that's a good news item. Obviously, somewhat offset by the fact that our import freight is going up. So I think overall, I think we would look for the freight effect maybe to be a little less as we go through Q4. I think as we look at just margin in general, obviously, as we've talked about, helium is a component of this. It does affect -- it does have a halo effect on what is one of our biggest departments and one of our most profitable departments.
And so we feel a little bit of that, but the team is working really hard to create other exciting items within that department that will drive that business, whether we have helium or not, which, obviously, we're working hard to make sure we have helium as well. So some moving pieces there. I would expect, though, that as if we do the things we need to do to execute on improving our freight going forward that you'll see it be less of an issue as we get into Q4 and the new year.
Operator:
And this does conclude our Q&A session. At this time, I'd like to turn the call back to Randy Guiler for closing remarks.
Randy Guiler:
Thank you, Aaron, and thank you for joining us for today's call. Our next quarterly earnings conference call to discuss Q4 and full year results is tentatively scheduled for Wednesday, March 4, 2020.
Operator:
And ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.
Operator:
Good day and welcome to the Dollar Tree, Inc.'s 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.
Randy Guiler:
Thank you, Cathy. Good morning and welcome to our conference call to discuss Dollar Tree's performance for the second fiscal quarter of 2019. Participating on today's call will be our President and CEO, Gary Philbin; our Family Dollar President, Duncan Mac Naughton; and our CFO, Kevin Wampler.
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 the most recent press release, most recent 8-K, 10-Q and annual report, 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. [Operator Instructions] Now I'll turn the call over to Gary Philbin, Dollar Tree's President and Chief Executive Officer.
Gary Philbin:
Thanks, Randy. Good morning, everyone.
As we reported today, the turnaround of the Family Dollar business continues to gain momentum. Family Dollar same-store sales increase of 2.4% was the third consecutive quarter of sequential acceleration and represented a 160 basis point improvement in the 2-year stacked comp. And despite sales headwinds created by the global helium shortage, Dollar Tree segment delivered a same-store sales increase of 2.4% while cycling a strong 3.7 increase from the prior year's quarter. Dollar Tree has now delivered 46 consecutive quarters of positive same-store sales and 8 consecutive quarters of 2-year stacked comps exceeding 6%. I'm proud of the team's accomplishments. During the quarter, we successfully consolidated our store support centers and, as planned, closed 296 Family Dollar stores as part of our store optimization efforts. Additionally, we completed 542 Family Dollar renovations into the H2 format. Our results for the second quarter included a sales increase of 3.9% to $5.74 billion. Consolidated same-store sales increased 2.4%. Our GAAP EPS of $0.76 exceeded our $0.64 to $0.73 per share guidance range. Other highlights for the quarter included completing 542 Family Dollar H2 renovations, completing $275 Dollar Tree Snack Zones, repurchasing 88.4 million of shares during the quarter as part of our share buyback program. At the end of July, we formally moved all business to the Chesapeake, Virginia campus. This represented the work over the past year to bring all functions and especially our merchant teams together. While we still have associates in the moving process, we now have one physical location to conduct our business. Regarding Dollar Tree's sales highlights for the second quarter. Dollar Tree had increases in both traffic and ticket with traffic slightly outpacing the ticket increase. Geographically, all regions comped positively. Cadence of comps through the quarter. All 3 months were better than 1.5% with June being the strongest month. Dollar Tree continued to deliver solid positive comps in the consumables category. Our discretionary business also comped positive but was impacted by the global helium shortage. We estimated that our comp was negatively impacted from lost balloon sales by approximately 40 basis points. We expect this helium shortage headwind to continue, but to a lesser degree, in the back half of the year. The first half is more impacted with the timing of our biggest balloon holidays, Valentine's Day, Mother's and Father's Day as well as school graduations. For real estate. In the second quarter for both segments, we opened a total of 150 new stores, 107 Dollar Trees, 43 Family Dollars. We relocated or expanded 17 Dollar Tree and 2 Family Dollar stores. We renovated 542 Family Dollar stores as part of our H2 renovation initiative, and we rebannered 106 Family Dollars to Dollar Tree stores for a total of 817 projects during the quarter. We also added freezers and coolers into 210 Dollar Tree stores during the second quarter, bringing our total of Dollar Tree stores with freezers and coolers to 5,970. During the quarter, we closed 305 stores, 9 Dollar Trees in consistent with our previous announced efforts to optimize our real estate portfolio of 296 Family Dollar stores. We ended the quarter with 15,115 stores, split out 7,306 Dollar Tree stores and 7,809 Family Dollars. Last week, we opened up our 24th U.S. distribution center located in Morrow County, Ohio, on time, on budget. The 1.2 million-square-foot facility is creating approximately 400 jobs in Central Ohio and will initially be serving Dollar Tree stores. It is equipped with the necessary system to serve both Dollar Tree and Family Dollar segments in the future. I would call out the partnership and support we received from the State of Ohio, Morrow County and the surrounding communities has been just outstanding. Before I turn the call over to Duncan to discuss the Family Dollar business, I'd like to provide you all an update on tariffs. We have been operating in unique times, to say the least, as it relates to tariffs. As I stated 1 quarter ago, our merchandising teams have done an outstanding job of mitigating the effects of the 25% tariffs imposed under Section 301 for Chinese goods included on Lists 1, 2 and 3. Prior to the recent USTR announcements on List 4 as well as the additional 5% tariff increase on all lists, we believe our team has successfully mitigated most of the adverse effects of the Section 301 tariffs. We've negotiated price concessions, canceled orders, modified specs, evolved product mix and diversified vendors. We are now taking actions to mitigate the recently announced tariff increases, and we'll continue to assess the future impact of those tariffs. Our merchandising team is experienced, committed and talented. They have developed a tested and proven process for mitigating costs and have the metrics in place to track and measure success. The team will continue to focus on delivering great values to our customers while managing and protecting margins. I'll now turn the call over to Duncan.
Duncan C. Mac Naughton:
Thank you, Gary, and good morning, everyone.
Before discussing Family Dollar's performance, I'd like to share details regarding a significant organizational milestone that we recently achieved. Effective July 22, we have successfully consolidated our store support centers into Chesapeake, Virginia. This was a large complex task that required effective communication, collaboration and teamwork throughout the organization. I'm proud of our team's attitude, commitment and determination throughout this process. Many of our associates stepped up to relocate with the organization and are now settling in the Southeast Virginia area. I'd also like to salute and recognize those who could not or chose not to relocate, but they stayed on through July to facilitate a smooth transition. The benefits of having our brands together in one location are simply immeasurable. The Family Dollar team is already seeing the benefits from the stability of having a clear vision of the direction and future of our company. The Family Dollar team delivered another quarter, a sequential improvement in comps with a 2.4% increase. The team's performance demonstrates that our efforts to improve the consistency of execution across our stores and our efforts to optimize the real estate portfolio are working and gaining traction. We continue to believe that we're making the right steps to transform our customer experience to increase the frequency of their visits. Regarding Family Dollar sale -- sales highlights for the second quarter. An increase in average ticket drove the same-store sales increase in the quarter as year-over-year transaction count was essentially flat. Our consumable business performed very well, delivering its 11th consecutive quarter of positive same-store sales. Regarding the cadence of comps during the quarter. May was up against the strongest compare from a year ago and was slightly positive, and June and July were the strongest months of the quarter. And notably, year-over-year traffic turned positive. From a regional perspective, comps for all 7 zones were better than 1% with the strongest performance in the West, Southeast and Southwest. A few weeks ago, we conducted Family Dollar's Annual Leadership Conference. This conference brings together our field leadership team and business leaders to teach, to learn, to network and strategize as we prepare for the very important holiday season. The field leadership teams, they're energized and focused. And they will take that energy back to their respective store teams. Theme of our 2019 meeting was the road to reinvention. We must evolve to be prepared for the future, and we're making smart changes and bold changes in our business at Family Dollar. As demonstrated by 3 consecutive quarters of improved comps, our customers are giving us credit for the improvements they're seeing in our stores, which include our H2 renovations, which continue to deliver low double-digit lift; and our grand reopening events are effectively getting the word out to the local communities. Key components for the H2 renovations are $1 STOP or $1 WOW sections throughout the whole store, more freezer and cooler doors with a broader selection of products, new signage, new decor with improved queuing lines at checkout, better lighting and much, much more. Our category resets are working. We're seeing material comp lifts post reset. Examples of a reset success include candy, household products and food storage. I'm very proud of the work the teams have done on our private brand offerings with improved labels and packaging. These national brand equivalent value-priced products represent an opportunity to deliver great values to our customer while driving customer loyalty, store traffic and profit dollars. At Family Dollar, we are on the road to reinvention. The team has delivered positive comps of 1.4%, 1.9% and 2.4% over the past 3 quarters, and I am pleased with the additional trends for the third quarter. We have the headquarter move behind us. We have an eager, energized and aligned leadership team and a terrific plan entering the holiday season. I look forward to providing you more updates on our progress in the quarters ahead. I will now turn to Kevin to provide more detail on our second quarter performance and our updated outlook for 2019.
Kevin Wampler:
Thanks, Duncan, and good morning.
Total sales for the second quarter increased 3.9% to $5.74 billion comprised of $2.96 billion at Dollar Tree and $2.78 billion at Family Dollar. Enterprise same-store sales increased 2.4%. And on a segment basis, same-store sales for both Dollar Tree and Family Dollar increased 2.4%. Overall, gross profit was $1.65 billion compared to $1.6 billion in the prior year's quarter. As a percent of sales, gross margin was 28.7% compared to 30.1% in Q2 of 2018. Gross profit margin for the Dollar Tree segment decreased 70 basis points to 33.8% when compared to the prior year quarter. Factors impacting the segment's gross margin performance for the quarter included merchandise costs, including freight, increased approximately 55 basis points primarily due to higher domestic outbound freight costs and an increase in the mix of lower-margin consumables sold; distribution costs increased approximately 10 basis points due to higher payroll costs; and occupancy costs increased approximately 5 basis points on the lower comp compared to the prior year.
Gross profit margin for the Family Dollar segment was 23.3% during the second quarter compared with 25.7% in the comparable prior year period. The year-over-year decline was due to the following:
markdown expense increased approximately 100 basis points resulting from store closure, rebanner and renovation markdowns, as anticipated, as part of our store optimization process; merchandise costs, including freight, increased approximately 95 basis points primarily due to increased sales of lower-margin consumable merchandise and slightly higher freight costs; and shrink increased approximately 45 basis points resulting from unfavorable physical inventory results in the current quarter and from changes to the accrual rate.
Consolidated selling, general and administrative expenses as a percent of net sales in the quarter increased 80 basis points to 24% from 23.2% in the same quarter last year. For the second quarter, the SG&A rate for the Dollar Tree segment as a percentage of sales improved to 22.5% compared to 22.6% for the second quarter of 2018. The improvement was due to the following:
store operating costs were lower by approximately 15 basis points due to lower utility costs, specifically electricity resulting primarily from the benefit of the LED lighting program in the stores; payroll costs increased approximately 10 basis points primarily due to an increase in store hourly payroll due to higher average hourly rate partially offset by lower retirement plan expenses.
SG&A expenses for the Family Dollar segment were 22.7% as a percentage of sales in the second quarter compared to 21.6% for the same period last year. The increase in SG&A as a percentage of sales was due to the net of the following:
operating and corporate expenses increased approximately 95 basis points resulting primarily from the loss of disposable and fixed assets due to the store closure write-offs; and stores' supplies expense to support the H2 initiative; payroll expenses increased approximately 35 basis points primarily due to average hourly rate increases and additional hours, including temporary health expense, to support H2 renovations; and depreciation and amortization expense decreased approximately 15 basis points as a result of certain assets becoming fully depreciated or amortized.
Corporate and support expenses increased 30 basis points as a result of $10.8 million of store support center consolidation costs and higher depreciation. On a consolidated basis, operating income was $268.9 million compared with $382.5 million in the same period last year. Operating income margin was 4.7% of sales compared to 6.9% of sales in last year's second quarter. Nonoperating expenses for the quarter totaled $40.5 million, which was comprised primarily of net interest expense. Our effective tax rate for the quarter was 21.1% compared to 18.9% in the prior year's second quarter. The quarter and prior year's quarter benefited by $5.8 million and $8.1 million, respectively, for a reduction in the reserve for uncertain tax positions resulting from statute expirations. For the second quarter, the company had net income of $180.3 million or $0.76 per diluted share. This compared to net income of $273.9 million or $1.15 per diluted share in the prior year's quarter. Combined cash and cash equivalents at quarter end totaled $623.4 million compared to $422.1 million at the end of the fiscal 2018. Our outstanding debt as of August 3, 2019, was $4.3 billion. During the second quarter, we invested $88.4 million in the repurchase of approximately 882,000 shares. At quarter end, we had $812 million remaining in our share repurchase authorization. We will provide updates on additional share repurchases, if any, following the quarter in which they occur. Inventory for the Dollar Tree segment at quarter end increased 15.1% from the same time last year while selling square footage increased 7.1%. Inventory per selling square foot increased 7.4%. Our inventory levels reflect the early receipt of imports to mitigate tariffs. We believe that current inventory levels are appropriate to support the scheduled new store openings, rebanners and our sales initiatives for the back half of the year. Inventory for the Family Dollar segment at quarter end decreased 2.3% from the same period last year and increased 3% on a selling square-foot basis. Capital expenditures were $293.3 million in the second quarter versus $213.4 million in the second quarter last year. For fiscal 2019, we're planning for consolidated capital expenditures to be approximately $1 billion, which is consistent with our initial 2019 outlook. Depreciation and amortization totaled $155.1 million for the second quarter and $152.5 million in the second quarter of last year. And for fiscal 2019, we expect consolidated depreciation and amortization to range from $630 million to $640 million.
Our updated outlook for fiscal 2009 (sic) [ 2019 ] includes the following assumptions. Calendar considerations for the remainder of the year includes the following:
there will be 6 fewer selling days between Thanksgiving and Christmas, which will negatively impact Q4 sales. With regard to tariffs and the recent USTR announcements, we estimate that without mitigation, List 4A and the additional 5% tariffs on List 1, 2 and 3 would costs the company approximately $26 million in additional tariffs. Our updated outlook does not include the recently announced tariff increases as we are currently working to mitigate these costs.
Our company outlook on March 6, 2019, included $95 million in discrete costs related to our Family Dollar store optimization initiative and our store support center consolidation. With the increased visibility of our overall costs, we now expect to incur $85 million in discrete costs for the year, of which we've incurred $76 million in the first half of the year. Our Q3 outlook includes the remaining estimated $9 million in costs related to these initiatives. We expect continued pressure on store payroll based on competitive markets, states increasing minimum wage and completing the company's initiative plans. We expect year-over-year domestic freight costs as a percentage of sales to flatten out in the second half while import freight rate, as we noted in last quarter's call, will increase in the back half of the year. Net interest expense will be approximately $41.1 million in Q3 and approximately $162.7 million for fiscal 2019. We cannot predict future currency fluctuations, so we've not adjusted our outlook for currency rate changes. And as always, our outlook assumes no additional share repurchases. Our outlook assumes a tax rate of 22.4% for the third quarter and 22.1% for fiscal 2019. Weighted average diluted share counts are assumed to be 237.5 million shares for Q3 and 237.6 million shares for the full year. For the third quarter, we are forecasting total sales to range from $5.66 billion to $5.77 billion and diluted earnings per share in the range of $1.07 to $1.16. These estimates are based on a low single-digit increase in same-store sales and include approximately $9 million of discrete costs. For fiscal 2019, we are now forecasting total sales to range between $23.57 billion and $23.79 billion based on a low single-digit same-store sales increase and approximately 1.3% square footage growth. The company anticipates GAAP net income per diluted share for full year fiscal 2019 will range between $4.90 and $5.11, which includes discrete costs of $85 million or $0.28 per share and approximately $15 million or $0.05 per diluted share in store-closure-related costs. I'll now turn the call back over to Gary.
Gary Philbin:
Thank you, Kevin.
I will share a brief update on our early reads from the Dollar Tree Plus! test. We are in the very early stages of our multi-price point test at select Dollar Tree stores, and we'll continue to closely monitor the results, including impacts to traffic, sales and margins. Some details related to the test are, launched in mid-May, by the end of June, we had the test rolled out to approximately 115 stores. The test includes newly added products at price points of $2, $3, $4 and $5. The products being tested, which currently include about 200 SKUs, are clearly identified as Dollar Tree Plus! items providing customers more choices, more sizes, more savings. We are testing a cross section of high-, moderate- and low-volume stores as well as urban, suburban and rural settings, so we can understand how customers respond in the varying markets. Early in the test, the product mix has leaned more towards consumables, and this will evolve as we move towards the holiday season with more discretionary items added to the test. We've received feedback on the values from our customers on the initial merchandise assortment, and this is critical as we know we want to protect the Dollar Tree brand. Our customers view Dollar Tree as the destination for terrific value for what you spend in $1. We are pleased with how our teams have started and implemented the test across varied geographies to our volumes and size. It's giving us valuable insights to how our customers view these values across a Dollar Tree store. Our teams are excited about the evolution of the merchandise assortment as we approach the holiday season. On our most recent import trip, we have bought specifically for Dollar Tree Plus! stores and I think excited about the additional assortment that will resonate with our customers as we go into our holidays. Finally, I wanted to share a few words regarding our field leadership meetings that I attended in the past few weeks for both Family Dollar and Dollar Tree. This is the opportunity to connect with field leaders face-to-face, teach and learn, recognize, reward all those individuals and teams for performance and service awards. We interact with buyers and sellers. The merchants and our field team work together. We coach and mentor people development and ensure that we are all aligned heading into the important holiday season. We had very productive meetings, and I'm pleased with the focus on business acumen of our businessmen and women that our leading our field organizations. Our leaders are energetic, focused and motivated going into this important back half. Operator, we're now ready to take your questions.
Operator:
[Operator Instructions] We will take our first question with Simeon Gutman with Morgan Stanley.
Simeon Gutman:
I wanted to ask about some of the improvement in the Family Dollar comp. To what extent you can tie it to initiatives versus underperforming stores coming out of the comp base versus macro strength? And do you think that we've turned a corner here on a higher run rate? I mean it's been a few quarters now of improved sales.
Gary Philbin:
Yes. I'd tell you what, we're pretty excited about the 2.4% comp at Family Dollar. And what's most exciting, to your question, is all boats are rising. We're seeing a great performance in our H2 stores. But to me, what we're seeing is the bulk of the stores are also driving great comp sales. And as I talked about on my prepared remarks, we're now seeing positive traffic across the chain. So that's telling us our customers are liking what we're doing as we clean up our stores.
As you know, we have roughly 1,000 H2 stores out there, and we closed the quarter with 7,809. So the good news here is we have multiyears to add as we're going to talk about 1,150-or-so stores this year and how do we really change the face of our chain. So I would tell you that we can't -- with that small store base, we can't run the whole comp. So we're seeing the balance of the chain really help there. We did have some help from store closures, but it was not nearly as impactful as the balance of the chain.
Simeon Gutman:
And then in the follow-up, I guess, on margin and the visibility, at what point does the margin improve and sort of follow this top line? And related to it, can you just share with us on the Dollar Tree side how much helium may have hurt the GM and maybe the EBIT for the Dollar Tree business this quarter?
Kevin Wampler:
So as we look at the margin, as we look to the back half, obviously, the front half, in particular, was loaded with the discrete costs. As we've said, we have incurred about $76 million of what we now believe is $85 million of costs that we will incur. We look for the gross margin to become much more comparable to last year. It's obviously been down. I think the one thing that we have to always consider is we've been driving our business in the Family Dollar world with consumables. And even in Q2, the Dollar Tree business was driven by consumables based upon what everything we have going on, touching all these stores that we're touching.
So we're driving traffic. We're getting our core customer back into the store in Family Dollar, and they're liking what they're seeing. It's a little bit more consumable-driven. So our job that we still have ahead of us is to continue to improve our discretionary business, but we do look for the gross margin on the kind of dollar side to start to level out as we go through the back half.
Gary Philbin:
And Simeon, this is Gary. Let me add my color to that. For both banners, I think it's important as we went into this year knowing all the stores that were going to be torn up for renovations. H2 at Family Dollar, Snack Zones at Dollar Tree. By the time we were going to get to Q2, we will touch 1,000-plus stores. And by design, not exactly reading the crystal ball as well as you would like, we went in aggressively, closeouts, our WOW product at the Dollar Tree side, a little bit more on consumable side, on the merchandise plan at Family Dollar. So part of that was to make sure we could go through touchy stores, catch them, pull them back together and still drive a positive comp.
As far as balloons, the impact there was the impact of 40 bps. And that's really just on what we lost on balloon sales in the first half or in the second quarter year-over-year. And obviously, first half, as I called out, is a little more impactful. What we didn't measure was balloon sales usually have a halo effect of everything else in the party department, which is obviously one of our highest margin in a very large business, and it really drives customers to that store. So we know it's not going to be as impactful because the holidays aren't as big, and we'd like to think it's going to get moderately better as we go into '20, but that was probably the best way to measure the balloon impact.
Operator:
We'll take our next question from Matthew Boss with JPMorgan.
Matthew Boss:
Nice progress, guys. I guess first, at Family Dollar, how best to think about sequential same-store sales improvement opportunity in the back half of the year? Maybe what do you see as top drivers of the traffic inflection at your H2 remodels? And any color on early 3Q trends would be helpful.
Gary Philbin:
Yes. I'd tell you what, Matt, thanks for the question. We -- as you can see, our engine is growing. Our traffic is turning positive, and we're driving some real growth with consumables, and our job is to convert that to the discretionary side of the store to enhance our margin throughout the year. We've got a really strong back half plan and a strong holiday plan that we just shared with our leaders at the Annual Leadership Conference.
And I think year-over-year, you're going to see us continue to strive to grow our comps as we get more H2s on the ground, they mature. And what we're seeing in the balance of the stores is they're really starting to have higher standards at store level, and they're -- so the stores are getting cleaned up. The customer is noticing. And they're getting the components of some of the H2 stores while they may not be an H2 store. So we're trying to fast adapt as we learn what are the key winners in key categories. And we did some -- a number of resets last year that are now going to start cycling and be helpful to comp in the back half. So I feel pretty good about our business plan with comps as we look forward.
Duncan C. Mac Naughton:
Matt, and Gary, I would just add. I mean that's part of the energy and why we added more H2s. A showdown to our openers have gotten us ahead of the game to this point to get the 1,000 done by the time we finish up August to your Labor Day weekend, and we had some more runway. So we're up for another 150 to get done mainly through September, a little bit probably into October to give us more H2s on the ground. But to give credit to the Family Dollar team, the consistency of what we're seeing in-store, the work we've done on key resets are I think are what we see as lifting all boats right now.
Matthew Boss:
Great. And then as a follow-up, just to help break down margins. Could you help bucket the discrete costs at Family Dollar between the gross margin and the SG&A, both what you saw in the second quarter, how to think about the back half? And larger picture, what's the best way to think about Family Dollar's fundamental gross margin recapture opportunity that you see from here?
Kevin Wampler:
Matt, it's Kevin. As -- within my prepared remarks, I tried to get some good color on this. So let's kind of break it down into pieces here, if we can. So obviously, within the press release, we talked about $48 million of discrete costs within the quarter as well as $15 million of store closure costs. Within that -- so that's a total of $63 million or about 230 basis points. And basically, what I did -- if you take out the $10 million of store consolidation expenses, that means about $52 million sat within the Family Dollar segment. And as we called out within the prepared remarks, about 100 -- and that's about 190 bps. And that basically broke down really about 100 bps of markdowns, which you talked about. So you're talking about all the store closures, all the renovations, all the rebanners, everything related around that from that piece. And then on the SG&A side of it, it's all of the asset write-off for all the store closures, and again, we closed 296 stores during the quarter; supplies for the H2 renovations as well as labor, temp labor for the H2 renovations as well. So that's roughly 90, 95 bps. So that's kind of how to bucketize them the best way and the big-picture way.
As far as a go-forward margin, we have huge opportunities. Obviously, it's been a disappointing year from shrink perspective. We have a lot of opportunity as we go forward. As we talked about last quarter, look forward to start to flatten out in the back half on a comparative basis. A lot of initiatives in process there relating to:
one, just changes in leadership and structure, really working on our commitment to training and our execution of policies and procedures; defensive merchandising initiatives, analytics. And again, getting our inventory levels down as well will be very, very helpful in that regard. So I think we have a huge opportunity as we go into next year to help our gross margin in that regard.
Duncan C. Mac Naughton:
Matt, let me just chime in because I think -- and just a couple of callouts when I think about, first off, with increased traffic, we can steer this boat. And that's what the H2s are doing and what we're starting to see better in the rest of the fleet. And so an opportunity when somebody comes to the store and sell them compelling merchandise on the discretionary side becomes all the easier.
Secondly, I got to just tell you, having everybody in the same building now and the merchant teams on the same floor, vendors now meeting both banners at the same time, I can't tell you how excited I am about that. And we are a $25 billion company with a face to the vendor community. We can drive sales. And we will be on the short list of people that come to do that. And then finally, just the continued piece on imports for getting tariffs for a second, if we can, the opportunity to design and create value merchandise that sells at both Family Dollar and Dollar Tree is a big, big impact for us as we look forward.
Operator:
[Operator Instructions] We'll take our next question from Chuck Grom with Gordon Haskett.
Charles Grom:
Just, Duncan, I was wondering if you could amplify on the improvement in traffic in the quarter. I guess do you think it's new customers that you're gaining? Or is it existing customers repeating? And then one for Kevin, just a follow-up on Matt's question because there's a lot of confusion on the gross margin line and Family Dollar, so if I could like ask it from a different way. Just -- can you just sort of look at the onetime costs, both the discrete and the store closures, what that was from a basis point impact versus sort of the normal course of business, i.e., shrink and any markdown activity?
Duncan C. Mac Naughton:
Yes. Thanks, Jeff. As for Family Dollar traffic, I would say that, as we talked about, low double-digit lifts in our H2 stores, about 2/3 of that is coming from traffic. And so we're seeing transactions develop there, and we're seeing a lot of repeat purchases coming. So part of that, as we study the marketplace, we know we're acquiring some new customers from some other folks in the marketplace. So I would tell you that part of it is both our existing customer coming back more often and then getting, acquiring new customers that may have been a Family Dollar customer and through our grand reopening initiative as we communicate back to them that we've got a new Family Dollar for you, why don't you come check it out. And they see what we have to offer and while they may have stopped shopping with us, they come back to us. So we feel real good about that pattern.
So in the balance of the chain, we're seeing -- I think people are seeing that our store standards have been better, and they're seeing that we've been pretty aggressive with our growth in consumables, and we're working on discretionary side of the business, as Gary talked about, to move that customer over. We've also modified our marketing campaign to have more frequencies so that we can be in the marketplace more often, which I'm excited about because we've got a gap there before. So that will close that gap. So I would tell you that it's -- in the H2s, it's some new customers and the rest of the chain, it's both. And I think the good news is those trips are growing up.
Kevin Wampler:
And then, Chuck, in regards to your question relating to the Family Dollar margin. Again, really, 3 buckets related to the change year-over-year for the quarter. And again, it was 100 basis points from the markdowns related to the initiatives, about 95 basis points related to increased sales of lower-margin goods, as well as slightly at higher freight and then about 45 basis points related to shrink. So that's really kind of the 3 buckets as we put them in and can best describe for you.
So I don't know if there's any -- something beyond that, that you're looking for.
Charles Grom:
No. That's helpful. I just wanted to get all the information. And then just on the Tree, just maybe unpack for us the difference between the first and the second quarter gross margin performance, and I guess how you're thinking about it in the back half of the year.
Kevin Wampler:
I think if you look at the first quarter, gross profit was roughly flat year-over-year versus this quarter. And so we were impacted more by freight in this quarter than we were the first quarter. And again, a little bit of timing, a little bit of what we've got going on. Again, we did build inventory as well during the quarter with -- from an import standpoint to mitigate tariffs. So there's some effect from that a little bit.
But overall, as we look at it, I think the idea of freight was the bigger piece. We do look for that to mitigate a little bit as we go through the back half, as we've said. And then the other piece, as we called out, was really the idea that we did sell. We had a better consumable business in the second quarter. And so our sales mix, our margin mix averaged a little lower at the end of the day because of the overall consumable mix. As we go forward, I don't know that we -- as I've said, I don't think that we still expect to see the same type of pressure that we saw in Q2.
Gary Philbin:
Yes. And Chuck, I would just give you some color. I think really, the last 2 years, our seasons have gotten out of the gates very quickly and performed very well. All this inventory we brought in to beat the tariffs is there. That's the imports. It's higher margin. As we kick off, really, the fall/harvest season as we get past Labor Day, to me, we are set up to take advantage of what the Dollar Tree does best. And that's getting geared up on the discretionary side of the business. We've invested in consumables to make sure we had the kind of traffic and customer count we needed as we went through all of our Snack Zones. Snack Zones are delivering what we brought across the network. And now let's shift gears a little bit back to what the best time of the year is for Dollar Tree. And that's really September, October on through the Christmas holiday.
Operator:
[Operator Instructions] We will take our next question to Judah Frommer with Credit Suisse.
Judah Frommer:
First, to circle back to tariffs. It sounds like you've quantified the potential impact from the increase on Lists 1 through 3 and List 4A, but it's not embedded in the 2019 guide. Is the messaging that you do feel you can fully offset that? Or is the message that you're working to offset and you'll update us with the magnitude of offset at some point?
Gary Philbin:
Thanks, Judah. Yes. Short answer. Listen, I mean we're 6 days from the last change, right? So I mean here's how we've gone through the year. The merchant teams had mitigated Lists 1, 2 and 3, as we knew it. Then when List 4A, 4B first came out, we had plans on that and, actually, on our trip to Asia felt very good about where we were on that. And then of course, the most recent changes, make that the callout of our most recent news. Well, the things we're doing are working pretty darn well. I would say the vendor community is stepping up. We have done things like we've said before. We can really work hard on changing how we're packing things or the packaging, on how many units can we get on container so we can land the overall cost lower. We've been able to move, I would say, modestly $100 million on some of the buying trips out of China with our strategy of China plus 1.
I give credit to our merchants. This is about negotiating a vendor at a time to make those differences, and that's why I went into this call. We see the most -- we want to give you the math to give you some sense of the scale. And really, while it's work we got to do from 6 days ago, I have confidence in the group that we'll mitigate it for the balance of the year.
Judah Frommer:
Okay. Great. And Kevin, you are kind enough with Q4 earnings to give us an early read on next year and the earnings growth related to that. And I think you've been clear that you guys guide on a GAAP basis, but GAAP earnings have moved around quarter-to-quarter as discrete costs kind of come and go. Is there any directional update you can give us on how you're thinking about that earnings growth trajectory for next year?
Kevin Wampler:
No. We haven't updated the guidance we gave back in March on that subject. Obviously, we're just kicking off our budget season right now, as we speak, basically, for next year. And I don't think in -- simplest terms, I don't think anything in the base has changed. I think we have the unknown of tariffs and where they go and what they may do. I don't know that we -- any others have an answer for that at this point in time. We'll have to take that into consideration accordingly. But I would tell you the base case, I don't see necessarily a change in our thought process.
Operator:
Your next question is from Joseph Feldman with the Telsey Group.
Joseph Feldman:
I wanted to ask with regard to the new front end that you have at the Family Dollar side of the business, how many stores have that at this point? And like how fast can you get that to all the stores?
Duncan C. Mac Naughton:
Joe, thanks for the question. This is Duncan. We've got it obviously in all H2 stores, and we're putting it in all our new stores as well. The key constraint at a store level is kind of the size first and the width, second. And we do have multiple formats of the queuing line. So I will tell you that where we can, we're putting it in because it is very profitable to the store, not only the single-serve beverages that are there. But then again, the -- that front end is quite profitable, both on the snack side as well as -- you probably noticed, we've been putting discretionary items on there. And the team right now is testing another front queuing line that will actually enhance profitability for that front end and really fit the needs of our customer I think better. So it's primarily an H2 initiative at this point is where we're focused. Where we're doing any kind of other renovations, we'll see if it can be accommodated, but it's really the H2 number.
Joseph Feldman:
Got it. And then also, just a question on the DCs. I know you guys just opened the 24th new DC. And you made a comment that it's set up for both, but you're only going to start with the Dollar Tree. Can you remind us where you're at with how many, I guess, co-branded DCs that you do have at this point and how many you kind of want to have?
Gary Philbin:
Well, we have 1 DC that is in Utah that distributes to both Family Dollar and Dollar Tree. We now have 1, 2, 3, 4 additional DCs that have the internal workings and warehouse management system that allows us to deliver to both. We've needed the capacity for the Dollar Tree banner because we have capacity in the Family Dollar network because of their closures, the rebanners. And of course, that's putting pressure on the Dollar Tree banner. So ultimately, it comes down to the size of the building. Any new building that we've done, it comes out now with the ability to deliver either banner, which will be a place that we move to. And that's a stem-mile opportunity for us in the out years. It's right now a function of capacity needed for Dollar Tree banner to make sure we can service those stores. And we pick up, obviously, some stem mile every time we open up a Dollar Tree banner because we have more stores closer to that.
Operator:
Our next question comes from John Heinbockel with Guggenheim Securities.
John Heinbockel:
So two quick things. The -- I know there's not a lot of H2s with a lengthy history. But do you guys have a sense of how that format will mature and waterfall in years 2 and 3 comp-wise? Do you think it's above maybe what a new store would do? Like a normal new store, it settles into a more normal waterfall.
Duncan C. Mac Naughton:
John, it's Duncan. Thanks for the question. I think it'd probably comp like a regular new store is what we're thinking about. And we've got a handful of them that have kind of cycled themselves. So we're learning quickly, but it's behaving like a new store.
John Heinbockel:
Okay. And then maybe for Gary. When you -- again, I know that multi-price point is in its early stages here. But have you found anything interesting when you look at the basket construct of people who have a Dollar Tree Plus! item in there versus those who don't? Are there fewer items when they buy a Dollar Tree Plus!? How is it different?
Gary Philbin:
Thanks, John. I would say, at this point, it's purely additive to the basket. So it's telling us, I'm a Dollar Tree shopper. I come in. I like my regular items. And now here is something that surprised me is some of the feedback we hear. And that goes into the what was, "their regular basket." So I think we've start off with some items that are giving us some pretty good information how our customer views it. But what I'm really maybe most excited about is putting a bit more of the Dollar Tree whimsy and surprise of the WOW effect into some of the items. And then that will give us another variant to what customers are buying and especially as we get around holiday time. So more to come. We bought specifically for these stores, and they'll be in addition to the assortment as we continue to evolve and to get the best read we can.
Operator:
Our next question comes from Karen Short with Barclays.
Karen Short:
I just wanted to clarify a couple of things. You commented that you were pleased with 3Q trends at Family Dollar. So I guess I just want to clarify, is that to be interpreted that comps are above kind of where you came in, in 2Q? And then I had another clarification on guidance.
Kevin Wampler:
Duncan made that comment. I mean, obviously, I think we're only 3 weeks in. So it's not like we're going to get a whole lot of other information. But I mean we're pleased is where we would state it, that we're not going to make a statement whether it's higher or lower or what it might be, but we're very pleased at this point.
Karen Short:
Okay. And then just with respect to guidance or not guidance, but I guess loose commentary on 2020. I guess there's just a little confusion with respect to the comments you made in March. And I'm asking this question excluding tariffs. But when you think about that 14% to 18%, are you looking at a number that's based on GAAP EPS or adjusted EPS?
Kevin Wampler:
We said -- we've always said it's based upon GAAP EPS.
Operator:
Our next question comes from Kelly Bania with BMO Capital Markets.
Kelly Bania:
Just wanted to ask about tariffs. It was helpful to have the quantification I guess of the $26 million over the next couple of months. I guess -- I'm guessing in terms of List 4 that you're still working through that, which is why that wasn't quantified. But maybe you can just talk about order of magnitude, how that would compare to what you're quantifying today, if you can at all. And I guess a couple of other questions related to that. How much have you saved with respect to tariffs by bringing inventory early at multiple points throughout this year? And then is there at all an upper limit to what you think your team can offset here? Do you feel confident that even if you get into next year that this can further be mitigated?
Gary Philbin:
Kelly, well, listen, we're managing to what we know, let's start there. So I think what we try to paint a picture of the magnitude for this 4A when we knew it was initially 10%, that was in our sights. And the team went to work right away on 4A knowing that 4B was coming. We had more time on 4B. Once the tariff was increased for both List 4 and List 1, 2 and 3, we just sort of continued to do the same playbook that's been working for us. So everything that I had called out before.
So we're in the unique times, and we're in unique times where I think there is -- the opportunity is I would tell you that our vendor community is both -- wants to work through this and help, at this moment in time. And prior to this, they are also concerned they might lose business. And some have as we have found other opportunities either inside China or outside China. So there's never just one tune you play to overcome this. So what gives me confidence for the balance of this year is I can see the rocks in front of me and our teams have worked real hard to overcome what we see this year. Too early to comment on '20. Shoot, I'm trying to think about what might happen this week or next week. But we are working real hard on what we know today based on the USTR as we go into what's going to be the first increase on September 1 knowing that there's another one in October and then finally, December 15. Those are the ones that we know of right now.
Kelly Bania:
And I guess just on the inventory, how much has been mitigated by just bringing inventory in early?
Gary Philbin:
You know, we -- I can't in scale on -- of what we sell. I mean we try to bring items in. It's not a huge amount. I mean, of course, you try to bring it in if it's on the water. But keeping in mind it's 6 weeks before you leave a port and it gets somewhere else. And we're often not given 6 weeks to make much of a move. If we can do anything, we do. But it's not meaningful on the scale what we're talking about on cost of goods and the tariffs.
Operator:
Our final question comes from Edward Kelly with Wells Fargo.
Edward Kelly:
Just a few questions for you. First, I just wanted to ask you about store manager turnover at Family Dollar. I was just hoping you could give us an update on the progress that you're making there and the initiatives that you have in place to improve that.
Duncan C. Mac Naughton:
Edward, it's Duncan. Thanks for the question. I would say that store manager turnover has improved slightly. We're still at a level that I'm not happy with. But last year, we focused all our training at our field meeting on year of the manager, which was all about training our people, giving them tools, about hiring the right person, training the right person and retaining the right person. And we gave them many tools and consistent playbooks across the chain to do that. And we -- they've all been trained on that. And we highlighted it again this year and get -- updated those toolkits. And we've had national recruiting fairs, as you're probably aware of. And we've made progress there. It does attract a fair amount of people.
Gary Philbin:
And I would just have to call out with some of the same efforts, Dollar Tree is going to have 1 of its best 3 years ever since I've been here on store manager turnover. So I think the initiatives are well focused and pointing at the right things. And we're working real hard to get both banners to -- ought to be a banner year on store manager turnover.
Edward Kelly:
Right. Great. And just to follow up on Dollar Tree Plus! Any color you can provide on timing around a decision in terms of your assessment of the initiatives? And then do tariffs at all -- an escalation of tariffs impact sort of strategically how you're thinking about the Plus! format?
Gary Philbin:
Well, on the timing side, listen, I think as we get and evolve the assortment, we're going to learn more. So I can't quite give you a time line. I'm more interested in what can I learn from giving our customers an evolving assortment that will tell us more what resonates with her when she's in a Dollar Tree.
And as far as tariffs, obviously, anybody out there today who's importing is affected no matter what the price point. It obviously goes into the equation, but it does make you take a look at where you're buying it from. But to hit the mark, you have to really focus on what the customer wants, as always, in retail; and for our Dollar Tree stores, how does that play out. When we take a look at retail, that go up to $5. And I think it's -- that's really what we're focused on. What's in our -- what's our Dollar Tree customer going to look for in our world. And that's where our merchandising teams are very focused on.
Operator:
That concludes today's question-and-answer session. Mr. Guiler, at this time, I will turn the conference back to you for any additional or closing remarks.
Randy Guiler:
Thank you, Cathy, and 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 26, 2019. Thank you.
Operator:
That concludes today's presentation. Thank you for your participation. You may now disconnect.
Operator:
Good day, and welcome to Dollar Tree, Inc.'s First 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.
Randy Guiler:
Thank you, Aaron. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for Q1 2019. Participating on today's call will be President and CEO, Gary Philbin; Family Dollar President, Duncan Mac Naughton; and our CFO, Kevin Wampler.
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 Annual Report, 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. [Operator Instructions] Now I will turn the call over to Gary Philbin, Dollar Tree's President and Chief Executive Officer.
Gary Philbin:
Thank you, Randy. Good morning, everyone. I'm proud of our team's efforts throughout the first quarter, as many of the initiatives we discussed in Q4 have been kicked off and are progressing nicely.
Our Dollar Tree team delivered a solid increase in same-store sales while cycling its toughest quarterly compare from the prior year, and Family Dollar again demonstrated a sequential acceleration in comp sales. In fact, the Family Dollar segment delivered its strongest quarterly same-store sales increase since we began reporting comps for the banner. Results for the first quarter included a sales increase of 4.6% to $5.81 billion, consolidated same-store sales increase of 2.2%. The Dollar Tree segment delivered its 45th consecutive positive comp quarter with a 2.5% comp, and Family Dollar same-store sales delivered a positive 1.9% despite the shift of early SNAP sales into Q4 from February. GAAP earnings per share were $1.12. On an adjusted basis, excluding the accelerated rent expense for Family Dollar Stores scheduled to close in 2019 related to ASC 842, diluted EPS was $1.14, within $0.01 of the high-end of our guidance range. Other key highlights for the quarter included completing 372 Family Dollar H2 model renovations; completing 324 Dollar Tree Snack Zones; reinitiating our share buyback program, purchasing $100 million worth of shares in the quarter; and continuing to remain on track with our consolidation of store support centers, as many of our Family Dollar associates and new hires are now in the process of moving to the Chesapeake campus. As we outlined in the previous call, due to the costs associated with our store optimization initiatives and store support center consolidation project, year-over-year operating income is expected to be lower in the first half of fiscal 2019, but is expected to show improvement in the second half as the initiatives gain traction. The majority of our previously announced store closings are taking place in the second quarter along with the completion of our store support center consolidation. For Dollar Tree sales highlights in the first quarter. Dollar Tree saw nice increases in both traffic and ticket, with traffic slightly outpacing the ticket increase. Geographically, all regions comped positively. Cadence of comps through the quarter. April was the strongest comp month of the quarter, and March was negative. Both months were impacted by the timing shift of the Easter holiday. Dollar Tree continues to deliver solid positive comps in the consumables category, and our seasonal business performed very well. It remains strong, and our Dollar Tree's Easter season was one of our best sell-throughs ever. At Dollar Tree Canada, the team delivered mid-single-digit positive comps for the quarter with increases in both ticket and traffic. The consumable comp outperformed discretionary. Top-performing categories included Easter, seasonal, food and household products. Highlights in Q1 for Dollar Tree Direct are our online business. We saw increases on our in-line comp sales, items available-for-sale, site visitors and engagement. Our e-commerce team continues to do a great job of engaging with our customers through a number of avenues. Our online content is constantly evolving to reflect our changing assortment, and we are very active in promoting the Dollar Tree brand through blog posts, banner ads and social media. The team also did a great job in producing and distributing our catalogs for the Easter holiday and the upcoming summer season. Looking at real estate for both banners in the first quarter, we opened a total of 91 new stores, 65 Dollar Trees and 26 Family Dollar Stores. We relocated or expanded 11 stores, 6 Dollar Tree and 5 Family Dollar. We renovated 372 Family Dollar Stores as part of our H2 renovation initiative, and we re-bannered 45 former Family Dollar Stores to Dollar Tree for a total of 519 projects during the quarter. We also added freezers and coolers into 102 Dollar Tree stores during the first quarter, now bringing our total Dollar Tree stores with freezers and coolers to 5,766. During the quarter, we closed 25 stores, 9 Dollar Tree and 16 Family Dollar. And we ended with 15,264 stores, 7,102 being Dollar Trees and 8,162 being Family Dollar. Before I turn the call over to Duncan to discuss the Family Dollar business, I'd like to provide you an update on tariffs. Our merchandising teams have done a terrific job of mitigating the effects of 25% tariffs imposed under Section 301 for Chinese goods included on List 1, 2 and 3. We are uncertain as to whether or when tariffs will be applied to the List 4 products currently being considered by the U.S. Trade Representative. If tariffs on List 4 products are implemented, we expect that it will be impactful to our business and especially to consumers in general. Until we have more clarity, our outlook excludes the impact of tariffs on List 4 products. However, our outlook continues to include the impact of tariffs on List 1, 2 and 3 products. Our teams are doing a nice job managing the controllables and running our business. We continue to believe we are well positioned with the initiatives for both Family Dollar and Dollar Tree banners to capture the significant opportunity ahead of us. Now I'll turn the call over to Duncan.
Duncan C. Mac Naughton:
Thank you, Gary, and good morning, everyone. While we are pleased with the Family Dollar's team's same-store sale increase of 1.9% for the quarter, we recognize there is much more work to be done. As we make progress on improving the consistency of execution across our store base and accelerate our efforts to optimize the real estate portfolio, we see great opportunity to improve Family Dollar's productivity and performance in 2019 and beyond. We are very bullish on our progress to date and believe this will help transform our customer experience.
Regarding Family Dollar sales highlights for the first quarter. An increase in average ticket drove the same-store sales increase in the quarter, partially offset by a decline in transaction count. Consumables performed very well, delivering its 10th consecutive quarter of positive same-store sales, and the discretionary business was slightly negative. Regarding the cadence of comps during the quarter. February was negative, impacted by the shift of early SNAP sales into Q4. March was slightly positive, and April was the strongest month of the quarter, benefiting from the later Easter in 2019. 7 of our 8 lines of businesses comped positive for the quarter. From a regional perspective, 6 of our 7 zones comped positive, with the strongest performance in the Northeast, the West and the Southeast zones. As evidenced by our improved sales performance, our acceleration of initiatives to optimize the Family Dollar real estate portfolio is delivering results. We are seeing meaningful improvement in operational performance across the footprint of renovated Family Dollar Stores, resulting in increased traffic and low double-digit comp sales lifts. We are pleased with the results of our H2 renovation program, both with traffic and the diversity of our locations. Comps are being driven 2/3 by traffic and 1/3 by average ticket. Customer feedback has included the following. Customers indicate they're shopping more often and spending more for the improved assortment. Broader selection of $1 items, more frozen and refrigerated product and cleaner stores. Our survey feedback indicates H2 shoppers have a better overall shopping experience. More than half of the H2 stores -- shoppers indicate they'll come back and spend more. In May, we closed 140 stores, and we'll close another 150 by the end of July. We're making progress on our previously announced plans. Given the results we're seeing from our store optimization initiative, we're confident it will allow us to drive substantial improvement in the quality and performance of the Family Dollar portfolio and create long-term value. We're also in the process of consolidating our store support center. This is -- this project will be completed over the next few months and provide us great opportunity as an organization. We will benefit from the stability it provides and from the enhanced communication, collaboration and teamwork to provide our store teams with greater support. I will now turn the call to Kevin to provide more detail on our first quarter performance and our updated outlook for 2019.
Kevin Wampler:
Thanks, Duncan, and good morning. Total sales for the first quarter increased 4.6% to $5.81 billion comprised of $2.96 billion of Dollar Tree and $2.85 billion of Family Dollar. Enterprise same-store sales increased 2.2%. On a segment basis, same-store sales for the Dollar Tree segment increased 2.5% or 2.4% when adjusted for Canadian currency, and the Family Dollar comp increased 1.9%.
Overall, gross profit increased 1.6% to $1.73 billion compared to $1.7 billion in the prior year's quarter. As a percentage of sales, gross margin decreased to 29.7% compared to 30.6% in Q1 of 2018. Gross profit margin for the Dollar Tree segment was flat at 34.5% when compared to the prior year's quarter. Factors impacting the segment's gross margin performance for the quarter included higher distribution, depreciation and payroll costs, increased freight costs, primarily outbound freight, as well as a higher proportion of sales in the lower-margin consumable category. These increases were offset by improved shrink and improved initial merchandise markdown.
Gross profit margin for the Family Dollar segment was 24.8% during the first quarter compared with 26.7% in the comparable prior year period. The year-over-year decline was due to the following:
merchandise costs, including freight, increased approximately 90 basis points, primarily due to increased sales of lower-margin consumable merchandise, higher domestic freight costs and inventory markdowns for stores being closed and re-bannered in Q1.
Shrink increased approximately 50 basis points, resulting from unfavorable physical inventory results in the current year and an increase in the accrual rate. Distribution costs increased approximately 35 basis points, resulting primarily from higher merchandising and distribution payroll-related costs. Occupancy costs increased approximately 20 basis points, resulting from the $6.7 million of accelerated amortization of the right-of-use assets for Family Dollar Stores we plan to close during 2019. Excluding these costs, occupancy costs would have delevered slightly as a percent of sales.
Consolidated selling, general and administrative expenses as a percentage of net sales in the quarter increased 40 basis points to 23.1% from 22.7% in the same quarter last year. For the first quarter, the SG&A rate for the Dollar Tree segment as a percentage of sales increased to 21.3% compared to 21.1% for the first quarter of 2018. The increase was due to the following:
payroll costs increased approximately 20 basis points, primarily due to an increase in store hourly payroll due to an increased average hourly rate, support of company initiatives and an increase in incentive compensation resulting from prior year adjustments due to lower performance of target. These increases were partially offset by a decrease in retirement plan expense.
Operating and corporate expense increased approximately 5 basis points resulting from higher debit and credit fees, primarily due to increased card penetration. Store operating costs decreased approximately 5 basis points due to lower utility costs, specifically electricity, resulting primarily from the benefit of the LED lighting program in the stores.
Selling, general and administrative expenses for the Family Dollar segment was 21.6% as a percentage of sales in the first quarter compared to 21.5% for the same period last year. The increase in SG&A as a percentage of sales was due to the net of the following:
payroll expenses increased approximately 25 basis points, primarily due to an increased store hourly payroll -- increased average hourly rate and a support of the company's initiatives related to the costs per store renovations, re-banners and closures.
Store operating costs increased approximately 10 basis points, due primarily to higher refrigeration repairs and maintenance costs in the current quarter. And depreciation and amortization expense decreased approximately 25 basis points as a result of certain assets becoming fully depreciated or amortized. Corporate and support expenses increased 20 basis points as a result of $7.6 million of store support center consolidation costs and higher legal fees. On a consolidated basis, operating income was $385.5 million compared with $437.6 million in the same period last year, and operating income margin was 6.6% compared to 7.9% in the last -- in last year's first quarter. Operating income margin for the Dollar Tree segment declined 20 basis points to 13.2% when compared to the prior year's quarter. Operating income margin for the Family Dollar segment was 3.2% for the quarter. Nonoperating expenses for the quarter totaled $41.6 million, which was comprised primarily of net interest expense. Our effective tax rate for the quarter was 22.1% compared to 22.6% in the prior year's first quarter. For the first quarter, on a GAAP basis, the company had net income of $267.9 million or $1.12 per diluted share compared to net income of $160.5 million or $0.67 per diluted share in the prior year's quarter. This year's first quarter included $6.7 million or $0.02 per diluted share of accelerated rent expense related to the adoption of ASC 842 for lease accounting that was not included in our previous company outlook. Adjusted EPS was $1.14. The prior year's quarter included $0.52 of costs associated with debt refinancing. Today's press release includes a reconciliation of non-GAAP financial measures for details on these adjustments. Combined cash and cash equivalents at quarter end totaled $725.8 million compared to $422.1 million at the end of fiscal 2018. Our outstanding debt as of May 4, 2019 was approximately $4.3 billion. During the first quarter, we invested $100 million in the repurchase of approximately 960,000 shares of stock. At quarter end, we had $900 million remaining in our share repurchase authorization. We will provide updates on additional share repurchases, if any, following the quarter in which they may occur. Inventory for the Dollar Tree segment at quarter end increased 10.6% from the same time last year, while selling square footage increased 5.7%. Inventory per selling square foot increased 4.6%. We believe that current inventory levels are appropriate to support the scheduled new store openings, re-banners and our sales initiatives for the second quarter. Inventory for the Family Dollar segment at quarter end decreased 3.8% from the same period last year and increased 3% on a selling square-foot basis. Capital expenditures were $209.2 million in the first quarter versus $180.9 million in the first quarter of last year. For fiscal 2019, we're planning for consolidated capital expenditures to be approximately $1 billion, consistent with our initial 2019 outlook. Depreciation and amortization totaled $151.2 million for the first quarter. Depreciation and amortization expense was $151.5 million in the first quarter last year. For fiscal 2019, we expect consolidated depreciation and amortization to range from $635 million to $645 million.
Our updated outlook for fiscal 2019 includes the following assumptions:
calendar considerations for the remainder of the year include that there will be 6 fewer selling days between Thanksgiving and Christmas, which will negatively impact Q4 sales. Our guidance includes the expectation that Section 301 tariffs will be 25% on List 1, 2 and 3 goods. However, our guidance does not include potential tariffs on List 4 goods.
Our company outlook on March 6, 2019 included $95 million in discrete costs related to our Family Dollar store optimization initiative and our store support center consolidation. With the increased visibility of our cadence of projects, we now expect to incur approximately 90% of these costs in the first half of the year. In Q1, we incurred approximately $28 million for these initiatives. Our Q2 outlook includes an estimated $57 million in costs related to these initiatives. As noted with our company outlook on March 6, we did not include charges for lease obligation and related expenses for any closed doors in 2019 as we could not estimate the P&L impact until after the adoption of ASC 842, the new lease accounting standard. We now expect to incur approximately $30 million or $0.10 per diluted share of costs in Q2 related to store closings for lease obligations and related costs. We entered into new import freight contracts effective May 1 based on negotiations in April. The new contracts were unfavorable compared to our prior outlook and will add approximately $15 million or $0.05 per diluted share of expense in the back half of the year that was not included in our original company outlook for fiscal 2019 provided on March 6. We expect continued pressure on store payroll based on competitive markets, states increasing minimum wages and completing the company's initiatives plans. We expect year-over-year domestic freight costs as a percentage of sales to increase in the first half of the year and then flatten out in the second half. Net interest expense will be approximately $40.5 million in Q2 and approximately $161.8 million for fiscal 2019. We cannot predict future currency fluctuations, so we've not adjusted our guidance for changes in currency rates. Our guidance assumes no additional share repurchases for the year. Our guidance assumes a tax rate of 22.6% for the second quarter and 22.4% for fiscal 2019. Weighted average diluted share counts are assumed to be 238.6 million shares for Q2 and 238.8 million shares for the full year. For the second quarter, we are forecasting total sales to range from $5.66 billion to $5.76 billion and diluted earnings per share in the range of $0.64 to $0.73. These estimates are based on a low single-digit increase in same-store sales and includes approximately $57 million of discrete costs. Additionally, as I've noted, our outlook now includes approximately $30 million or $0.10 per diluted share of costs related to Q2 store closures for lease obligations and related costs that was not included in the company's previous outlook. For fiscal 2019, we are now forecasting total sales to range between $23.51 billion and $23.83 billion based on a low-single-digit same-store sales increase of approximately 1% of selling square footage growth. The company anticipates GAAP net income per diluted share for full year fiscal 2019 will range between $4.77 and $5.07. This includes discrete costs of $95 million or $0.31 per share, as previously disclosed. Additionally, our outlook now includes $30 million or $0.10 per diluted share in store closure related costs and import freight costs of $15 million or $0.05 per diluted share related to increased import freight rates, as previously described in our updated outlook. I'll now turn the call back over to Gary.
Gary Philbin:
Thanks, Kevin. Before turning the call to your questions, I'd like to share some information about our Dollar Tree Plus! test.
As announced last quarter, we are conducting a test by lifting the dollar price point restriction. Testing is not new to us, and we've got a long track record of using an analytical approach to challenge our own thinking. It's the kind of approach and process that led to the development of our H2 stores in Family Dollar and gave us the confidence to accelerate our store optimization program across the Family Dollar portfolio. We spent the past several months laying the groundwork for this test, carefully and thoughtfully designing a test that we believe will allow us to measure the impact of different price points, items and categories on shopping behavior, store profitability and our loyal customers' affinity for the Dollar Tree brand. We'll be leveraging Family Dollar and Dollar Tree distribution center systems and combined merchandise to efficiently get the new products into Dollar Tree stores without disrupting our normal operations. For the test, we have selected sales stores located in urban, suburban and rural markets, and we will be measuring the performance versus prior results as well as against our control stores in similar markets. As part of the planning for the test, our Dollar Tree team has been working closely with the Family Dollar merchants to identify the right products to include. We'll be offering a range of items across a number of categories. We will be testing primarily at price points of $3, $4 and $5, and the products will be displayed in 4-foot sections or end caps clearly branded as Dollar Tree Plus! in order to minimize confusion with our dollar values that our customers have come to expect. We believe the wow factor of what we have created at Dollar Tree should carry over to this test and continue to build our brand. This is not raising items from our dollar price point to a higher retail, this is about adding new items and categories to add sales and margin. The test officially launched a few weeks ago with products hitting the shelves of the first batch of stores. We are in the process of rolling it out to more than 100 test stores, and we'll measure, analyze and adjust products, layout and other variables to ensure we are responding to customer feedback in our continued merchandising efforts. Because it's an iterative process, we now have a set time frame for the test. It's in the early days right now, but we will have more details to share on our progress in the future. Lastly, my thanks to all of our store teams that are engaged daily to deliver great service and value to our customers, and a call-out to all of our family Dollar Tree members that are in the process of moving while we consolidate campuses or are staying on to train as necessary. I'm proud of everyone's efforts and achievements during this first quarter. Now we're ready to take your questions.
Operator:
[Operator Instructions]
We'll take our first question from Robby Ohmes with Bank of America Merrill Lynch.
Robert Ohmes:
My question is actually on the H2 format. And I guess maybe Gary and maybe Duncan should answer this, but just could you guys talk through -- so you've put party freezer and cooler in there. You're getting a 10-point comp lift. How far could you go with the Dollar Tree assortment over time would be one question. Another question is, can you tell us how, bringing that assortment into the H2 format, changes the store level operating dynamics? Does it change the payroll structure significantly? What does sort of the expected EBIT margin look like for a Family Dollar store that's in the H2 format?
Gary Philbin:
So Robby, I'll start and hand it over to Duncan. From the standpoint of what H2 has done, it's put in some key dollar sections throughout the store. And the opportunity there is just to leverage what we've done at Dollar Tree for years, and it gives our customer the opportunity to see these great values.
Obviously, we've added more frozen food doors that drives traffic, but as you've pointed out, we've also expanded seasonal party. We have a queuing line that sort of gives our customer the last chance to find great values. Let me turn it to Duncan on what we see as part of the opportunity to keep driving sales. We're pretty proud of a 10 comp in this fleet of stores, and we're going to continue to drive some additional efforts to see how high it can go. But Duncan?
Duncan C. Mac Naughton:
Yes. Thanks, Gary. Thank you, Robby, for your question. As Gary stated, we're pretty excited about the success we've had to date. It's very exciting to see customers as well as our team members when you walk these stores. It's not uncommon to get hugs and thanks from both customers and store people because the people really enjoy the store environment. So we're very excited about it.
Just one other thing I've noticed that we did fix the adjacencies of these stores to make our shopping experience much easier and thoughtful for our customer. And as we added the freezer and cooler doors with primarily food and dairy, we also added 6 doors of immediate-consumption products, which drive good gross margin for our business. Really in there is the soft drinks, the teas, the waters, the flavored energy drinks that are so popular amongst our customer. And more appropriately, we also added adult beverages, which drives foot traffic for our primary customer. So we're very excited about that. We do have 21 sections across the store with the Dollar Tree items in the store. And a number of things it does is it creates a halo of strong price impression for our customers, and we get feedback that says it looks like prices are lower. And we're getting great engagement from our customer in those sections, but the real magic there is that the categories are actually starting to rise. It's not just the dollar sections alone, but we get better penetration in some categories that we have seen in our traditional format. So I'm very excited about that. We provide additional labor when we reset these stores just because of the workload. And then we want to make sure that we don't -- we test how high is high with this. So we do invest additional labor, but then we wean the store back off and let it self-fund. Within about 4 weeks, it can get on a self-funding basis. We train one specific person in the store to handle the Dollar Tree items as they are different and they behave differently than our Family Dollar products. They're not planogrammed. They are -- we show them a section flow. So the work is relatively easy and also allows us to get in and get out of these categories pretty quickly without disappointing a customer. And so I would tell you that we're very bullish on what we're seeing today, both from the store teams, the labor and how it balances right back to the stores pretty quickly and the customer interaction.
Robert Ohmes:
So if I dream the dream, is the more -- these are smaller stores, but the more Dollar Tree assortment you get into an H2 Family Dollar, does the EBIT margin of that store start to look more and more like a Dollar Tree store EBIT margin?
Kevin Wampler:
Robby, this is Kevin. I think as we think about it, obviously, we're working to drive top line, first and foremost, right, because that helps leverage all of our fixed costs at the end of the day.
We've got a limited number of stores we've completed this time. Still a lot of work going on. The freezers and the coolers, adult beverage tend to drive a little bit lower margin at the end of the day. So we have to offset that with the party and the things like that. So it's a little bit too early, given the small number of stores in general. But I think in general, obviously, we're looking for an EBITDA lift. I don't think that the model is built such that we'll ever have EBITDA of a Dollar Tree store. Just given the amount of consumables we sell to our core customer for our Family Dollar banners versus discretionary business we've had in our Dollar Tree business, they will never -- they are never going to quite equate at the end of the day. But the idea, obviously, is to drive sales and drive improvement in that overall EBITDA margin as we go forward.
Operator:
[Operator Instructions]
We'll go next to Brad Thomas with KeyBanc Capital Markets.
Bradley Thomas:
I also wanted to follow up on the H2 performance. Really encouraging. I guess, when you look at Family Dollar here for this quarter, could you talk a little bit about how much of the comp lift you're seeing was explicitly from some of the initiatives that you have in place versus maybe just the cadence of the overall consumer? And as you're looking out through the balance of the year, do you still believe these initiatives are going to be a 1.5% tailwind to comps for Family Dollar? Or is there reason to perhaps get a little bit more optimistic at this point?
Gary Philbin:
Brad, thanks for your question. We're excited about what we're seeing really across the portfolio. I will tell you that this is just not H2-driven, this is really watching the entire performance of the company going up. And that was demonstrated by 7 out of 8 of our lines of businesses, positive comp in 6 of our 7 zones. So we're seeing a nice balance across the chain.
H2 obviously is a highlight amongst where we're investing those dollars when we get that nice lift. And we believe that is a sustainable lift as we start to continue to roll this across the United States and most of our store base over time. I will tell you that we've had great balance across our promotional sales, our baseline sales. And then when we're preparing to close some of these stores, we're seeing some good clearance sales. So we're getting a real nice, balanced approach. So we feel good about that. And the key here is the base business is solid.
Operator:
We'll take our next question from Michael Lasser with UBS.
Michael Lasser:
If we back out the $0.15 of incremental, one-time item from your guidance, the midpoint's going up $0.02, but the high-end of the range is coming down quite significantly. Why is that?
Kevin Wampler:
Well, I think if you look at the guidance, Michael, from where we started out for the year, basically, if you take the fact that on a GAAP basis for the quarter, you would have to reduce the high-end by $0.03, and you'd basically bring up the low-end by, I believe, it was $0.08. And -- so you have at adjustment.
And then beyond that, it's just the range always narrows as you go further down the end of the quarter, a quarter further into the year. We now have 3 quarters left, so we have roughly $0.40 range when we first started the year. We're now down to a $0.30 range. But then, otherwise, to your point, it's just -- it's the initiatives, the 2 new items that we've brought in. So I don't think there's anything to read into it other than that. From my perspective, we didn't -- the only changes to the guidance were for the lease obligation costs that we brought in. Again, as we noted, we couldn't give you those at the beginning of the year, given the fact that we had to adopt and implement ASC 842 before we could even calculate those costs. And then obviously, the new item with the new contracts on our import freight.
Michael Lasser:
And Kevin, should we still be expecting 14% to 18% EPS growth into next year? And what number should we be basing that growth off of? Should we be excluding the incremental $0.15 hit from those items that you mentioned?
Kevin Wampler:
No, Michael, I think as a backdrop of our outlook in March, we wanted to give a little longer-term outlook, given the significant investment we were making in this year in particular around the initiatives to drive improved performance in our Family Dollar Stores. And we're obviously very focused on all of our store initiatives and the projects. And as Gary and Duncan have described, we're making really good progress, and we like where we're going there. So that's very, very positive.
Given another point in time, I think -- I don't think we've changed necessarily our viewpoint. We've said at that point in time that it was based upon the GAAP number. We haven't really updated anything at this point, so I think it's -- I don't think anything's changed and we'll just continue to update you probably later in the year as we continue to work forward through this year and we have more data to work with.
Gary Philbin:
And Michael, from -- it's Gary. From my perspective, as we go through this year, with the initiatives we've called out, we're closing almost 400 Family Dollar Stores, a big investment in the H2s will go a long way first half, second half as we build momentum at Family Dollar.
For Dollar Tree, I'm pretty proud of what the team's accomplished with this quarter in overcoming the 25% tariffs, and we see ourselves chugging along here with the season still responding the way we like to see them come through with great sell-throughs. And our customers are responding, and we're set up in a nice way for the summer season after having some good spring sales on Mother's Day and Easter. So those 2 things together, I think as we go through the back half of the year, we'll see the momentum in the second half.
Michael Lasser:
And can I just clarify one thing? We recognize that you didn't include the final list of tariffs in your guidance, given all the uncertainty there, but can you help us understand the exposure? What percent of Dollar Tree's cost of goods come from China and would be at risk if the full list of tariffs go through?
Gary Philbin:
Well, here's how I think about it, Michael. If I had sat down last September and tried to take you through our exposure on those 3, I would have been wrong because our team mitigated most of it -- all of it as we went through our buying trips. And that's the approach we're taking on this List 4. Listen, I don't know when, how big, how much, what items are going to be excluded. We all know what hasn't been detailed out there. All I know is our team is doing the same process, running the same play. How do we mitigate? And that's everything from what we buy, how we buy it, where we buy it, how we ship it. We're going to use all those chapters in our playbook to get to the right answer on it. So -- listen, as it comes to pass or not, we'll keep the group updated, but we are not sitting back on this one. We're also figuring out how we mitigate it if it comes to pass.
Operator:
We'll go next to Peter Keith with Piper Jaffray.
Peter Keith:
So just a follow-up on Michael's question. With the current tariff exposure of List 3, you guys did a really nice job of mitigating that impact. If there was broader exposure to the rest of the Dollar Tree business, are there differences with some of the other categories that may receive new tariff exposure that would limit your mitigation? Or is it sort of a similar approach that you would use for the whole store?
Gary Philbin:
Well, I think the way I -- obviously, it's -- we import both banners. Not all of it comes from China. The vast majority does, of course. And so the things that we even did back on our January trip, we moved $100 million of seasonal buy out of China. We changed some of the specs that we were shipping items in just so we could pack more in a case, more cases on containers, so you could land it overcoming the tariff. We're looking at other countries.
The process will be the same. I mean, our merchants now have a pretty good -- I wouldn't wish this on us, but this made our merchants go and take a look at everything we're doing in terms of speccing product, where we're buying it from, negotiating, getting costs in our product. And those are going to be the foundational elements as we go forward into this next round.
Peter Keith:
Okay, that's helpful feedback. And maybe I want to pivot to the gross margins at Family Dollar specifically digging into the shrink headwind. So the shrink headwind has just continued to intensify over the last year. I guess looking at it on a 2-year stack basis, it's now an 80 basis point headwind. Could you give us your view and when we might begin to see shrink stabilize? And what are the steps you're taking in order to minimize that hit?
Kevin Wampler:
Yes. This is Kevin. I'll give you some background on that. Obviously, we're very disappointed in our results, and we own that. And we have not executed at the level we've expected to. So -- and this is, I would tell you, this is not sitting in the corner of somebody's desk, this is front and center for everybody, the operations team, the loss prevention team, the logistics team, management.
I think one of the things we have fought a little bit is our inventory levels. Again, our inventory levels have grown. If you saw for the first time this quarter, we're actually able to bring inventory levels down, and that's going to be a continued effort there by Duncan and team as we look at that. We've made changes in the reporting structure and leadership in regards to over -- looking at the Family Dollar banners with regards to loss prevention team and how we're looking at that. We have put in place several new programs. We're putting in a new analytics software. So we're doing a lot of things. And again, as you know, what we're working on now probably takes a little bit of time to see the benefits of, but my expectation is we see the effect of the negativity dissipate somewhat as we get towards the back half. Now we still have work to do. I think it's a disappointing trend, but I think there is a lot of work going on to really address this on an overall basis.
Operator:
We'll take our next question from Scott Mushkin with Wolfe Research.
Scott Mushkin:
I just wanted to get back to the profit dollars on the H2. It wasn't clear. Are EBITDA -- sorry, EBIT dollars up in those stores? Or are they flat? Or are they down, for the ones you've converted?
Kevin Wampler:
No, they're absolutely up.
Scott Mushkin:
They're up? Okay, great. And then looking -- I just want to poke a little bit more at this gross margin on Family Dollar. Where do you think we've gone? Obviously, they've come down a lot. Shrink's part of it. So number one is, is that shrink really just thieving? How should -- what's the #1 cause of that shrink? And number two, as we bounce Family Dollar gross margins, any thought where we can come back up to?
Kevin Wampler:
I think as we look at our gross margin Family Dollar, you kind of have to look at it in buckets is kind of the way I would think about it. So if we look at the -- overall, if we look at just the product margin, including freight, obviously, freight was a big headwind last year. A little bit of a headwind this year in the first half. We expect that to flatten out in the back half.
As we look at actual merchandise costs, a little bit of pressure, obviously, from selling more lower margin in consumable goods, a lot of work going on to really energize the discretionary business to help offset that, so that as we see that discretionary business continue to improve, I think we have the ability to offset that as we go forward. I think, obviously, markdowns this year will be a very tough year of markdowns because obviously we have all the initiative markdowns going into the P&L. I think occupancy cost was actually a good point here in Q1. As I noted, excluding the $6.7 million related to the adoption of ASC 842, we actually would have shown a slight deleveraging of occupancy costs as a percentage of sales. So those things are positive. So I think we'll still see pressure as we go through this year in particular because of some of the one-time costs and some of the initiatives things going on. I think as we get sales -- continue to see sales improve, that helps leverage some of these things and gets us back on track to improving it back to where we would like to see it.
Gary Philbin:
Scott, this is Gary. Let me just give you my color on it because the way I think about it, the things around our logistics costs, the shortage of truck drivers was an impact this year. That will level out in the back half. The DCs, we've -- listen, we've paid up more just to get people to work in distribution centers, but our productivity over time will catch that up and surpass it.
Shrink, we have everybody on a red alert. This is -- that's controllable. And where does it come from? Well, as any good retailer, you look inside and outside, but we're just going to be smarter on responding to it more quickly. And Duncan and team are working a lot to get our folks trained. But the margin piece, here's still the opportunity that I think we -- besides what we're doing at H2, we still are working real hard on private brands. We have a pretty good base level penetration, but it's going to grow more over time. And the import piece, if -- what we've continued to work on, the Chinese tariffs, it's shining even a brighter light on the opportunities there, and not just the fact that we're buying some items in China. But when we get a chance to move something from a domestic to FOB China to finding the folks that actually make it all enhances the margin there. We've still got runway there, and that's the upside opportunity at Family Dollar on the margin side.
Operator:
We'll take our next question from Scot Ciccarelli with RBC.
Scot Ciccarelli:
A question on the Dollar Tree Plus!. Really 2 questions. First, philosophically, why are you not testing $2, but focusing on $3 and $5? Just trying to understand that. And then number two, how much of the store or SKU base will be, let's call it, repriced as you run through that test?
Gary Philbin:
Well, a couple of important points, Scot. I mean, you may see some $2 in there. I think the point I was trying to make is we're going to see full price points. You're not going to see $3.25. You're not going to see $4.65. I think our customer, we're going to make this very easy for her to figure out as we go through it.
And I just want to emphasize, we're not raising retails on the dollar items that our folks have come to love and count on. And I've gotten more letters from schoolteachers that are threatening me in a nice way that I don't dare do that. But I think our opportunity here is to find some additional categories, items that can add to the sales, and that's really the intent of this. It's does our customer understand the wow factor that we've worked so hard on all these years to make Dollar Tree a breakthrough brand in America? And can we take that wow factor and put it into the store and make our customers understand it and they understand the wow as we lift the dollar price point. So I think it's going to be very clear to the customer what these items are. They'll see the items with a sticker on them or prepriced in some fashion. That will be very clear to them. And our folks are being trained to answer all those questions. It's -- we want our customers, when they raise their hand and say, "How much is this?" it's not going to be because they're confused on the price, it's going to be because they still see these incredible values. So we're all over this in terms of getting good execution first during rollout, what do we learn as we do that, and then following up with customer feedback as we go through the process.
Scot Ciccarelli:
Yes. The full price point certainly make sense. How much of the store's SKU base will be, let's call it, changed?
Gary Philbin:
Well, I mentioned you're going to see, let's just say, 100-plus SKUs. And listen, in the same way we do at Dollar Tree today, you're going to see items come and go while you see it. It's not always going to be there.
And so when you think about the SKU base, we're going to start someplace and probably end up skating somewhere else, but that's about where we're going to start and just learn as we go.
Operator:
[Operator Instructions]
We'll go next to Paul Trussell with Deutsche Bank.
Paul Trussell:
Appreciate all the color on updated outlook and margins, but I wanted to just follow up and just maybe get a little bit more detail on specific expectations for 2Q versus the second half on some of those key items like freight and shrink payroll. If you can just give us a little bit more detail on how we should think about the cadence.
Kevin Wampler:
Yes. I mean, I think freight, we've been fairly transparent on it in the sense of, from a domestic standpoint, we've said it's a headwind in the first half of the year. I believe it becomes basically flat in the second half.
We've seen just some -- from an overall perspective, inbound has started to regulate itself a little bit. It seems like domestic's still running a little high. And then, obviously, we gave you the news on the import. I think that's about $0.05, but it's back half related if you think about that. Payroll in general, again, store hourly payroll is going to continue to basically be up slightly as we go through the year, probably no different than what we saw in Q1. We continue to see, from an employment standpoint, an increase in average hourly rate in our stores. And I think that's part of it. So we have that. And then I think from a shrink perspective, as I said, I think it's likely to continue to be up in Q2. My view is we need to see that start to level out as we get to the second half. I think as -- the other thing to remind everybody is initially, when we were talking about the costs related to the initiatives at the beginning of the year, we said about 75% of those costs would be incurred in the first half of the year. We're now, today, we said roughly 90% of those costs would be incurred in the first half. So based upon the fact that we can -- we've seen the cadence and the efficiency we've gained there and how our projects are laying out for the year, we've been able to see that. And obviously, it gives us that foundational base of the $57 million of costs that we're going to see in Q2 related to all those initiatives. And those touch many, many lines. It touches labor. It touches markdowns. It touches various other costs as well. So those are all kind of blended in there at the end of the day, Paul.
Paul Trussell:
Got it. And then bigger picture, as we think about the fact you are doing a lot of remodels, closing a number of Family Dollar Stores, just wanted to take a step back and get your current outlook on the opportunity still for new door growth in the dollar store industry. Maybe speak to new store productivity that you're seeing today and just where the white space is.
Gary Philbin:
Paul, this is Gary. So we had said a few years ago, 25,000 domestic U.S. and 1,000 in Canada. I think on the U.S. side, I'd still see that opportunity, is going to be both Dollar Tree and Family Dollar. And I think as we've learned about the business, the opportunity to build Family Dollars, we were probably 60-40, even closer to 70-30 urban versus rural over time. I see that switching. I see our greenfield for Family Dollar being more rural than urban. I don't know if they'll switch to a percentage of 70-30, but probably closer to something like that over time.
And I think the opportunity is sort of what we've called out. What we deliver is a great box shopping environment, items that people need, that as independent drugstores, grocery stores or other retailers are failing, it gives us an opportunity to grow for really both banners. But at Family Dollar, that's an opportunity in rural America. I think Dollar Tree continues to be one of the great brands in America. It cuts through the clutter. We still see the same opportunity across a broad middle of -- we can go anywhere, but Family Dollar probably works best inside the beltway and in the extreme rural. And for Dollar Tree, we still see plenty of opportunities. I think you make a good point. We're spending a lot of time and energy on the 1,000 renovations this year on H2. We've got 1,000 -- we're obviously talking about Snack Zones, but we're touching 1,000 Dollar Trees as well. But the opportunity to build more doors is there. It's going to switch more to that in the out years. When you take a look at the number of stores we'll have touched on H2 renovations this year, 1,000, the new stores behind us. By the time we get through end of next year, we're going to be closing in -- somewhere close to 40% of our Family Dollar fleet having been touched through our renovation or being new in the last 4 years or so. So it's going to be a change from what our customers have seen in the past. So we're bullish on what H2 can do for us, where it can operate, where we can grow it. And for Dollar Tree, we continue to be, as always, selective on the right sites for a Dollar Tree. But it's still a growth story for both banners as we look forward.
Operator:
We'll take our final question from John Heinbockel with Guggenheim Securities.
John Heinbockel:
So either for Gary or Duncan. When you guys think about the Family Dollar's organization -- the organization's capacity, right, for change, and particularly on the real estate side, as you think about the 1,000 renovations, is that sort of the max? Can the platform handle more than that? And then the success of that, does that -- when you think about the bell curve on store performance, once you close the stores you're going to close this year, we're basically through now because of the H2's promise, another round of closings next year or beyond.
Duncan C. Mac Naughton:
John, it's Duncan. Thanks for the question. I will tell you that the Dollar Tree enterprise team, actually based here in Chesapeake, really runs and leads all the store development work across the country for both of the banners. And it's supported locally, obviously, with the folks that are in the field, a mixture of both the Dollar Tree and Family Dollar people. But I will tell you that we are -- nowhere near our capacity here, we're -- as you know, we're also adding freezers and coolers across the chain. We're adding 1,000 licenses and beverages at Family Dollar. We're doing the 1,000 Snack Zones that Gary talked about. We'll add 200 stores -- new stores at Family Dollar, 350 at Dollar Tree. I think as we get more stores on the ground in H2, we also are getting much more efficient on how to handle this, both with our teams as well as our suppliers to make these things go faster.
I will tell you, and looking forward, I know that we will typically close 70 to 80 stores a year just based on normal store closures and maintenance of where the store performs.
Gary Philbin:
And John, it's Gary. Just from the standpoint of the store closures, we took a look at what needed to close outside of lease term. And that's what we're doing in the second quarter this year. As always, we take a look at end of lease term for our fleet of stores to figure out how do we optimize where they're headed for, and actually reach out for our landlords to get input and contributions from them to now help us reinvigorate some of their properties on H2 as we go forward.
So we'll be doing more of that, but as we go forward, second quarter is going to be where we particularly hit on the stores closing out a lease as we go through the out years either at 75 to 100, depending on the number of stores coming up on any quarter is probably closer to where we'll end up.
Operator:
Ladies and gentlemen, this does conclude our question-and-answer session. At this time, I'd like to turn it back to Mr. Randy Guiler for any additional or closing remarks.
Randy Guiler:
Thank you, Aaron. Thank you for joining us for today's call and especially your continued interest in Dollar Tree. Our next quarterly earnings conference call to discuss Q2 results is tentatively scheduled for Thursday August 29, 2019. Have a good day.
Operator:
Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.
Operator:
Good day, and welcome to the Dollar Tree, Inc. Fourth 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.
Randy Guiler:
Thank you, Britney. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the fourth fiscal quarter and the fiscal year 2018. Participating on today's call will be our President and CEO, Gary Philbin; and our CFO, Kevin Wampler.
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 annual report, 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. As a reminder, the fourth quarter of fiscal 2017 was comprised of 14 weeks as part of our 53-week fiscal year. The extra week in 2017 contributed $406.6 million to sales and $0.21 to diluted EPS. In the fourth quarter of 2018, the company incurred several discrete charges, including a $2.73 billion noncash charge for goodwill impairment, a $40 million inventory markdown reserve related to the Family Dollar segment, a $13 million noncash impairment of certain store assets and a $1.5 million acceleration and noncash deferred financing charges associated with debt repayment.
The fourth quarter of fiscal 2017 include the following discrete items:
a $35 million recovery related to the Dollar Express settlement, a $12.6 million charge for an increase in the workers' comp reserve, and a $9.8 million acceleration in noncash deferred financing costs. These items are detailed in the reconciliation of non-GAAP financial measures in today's earnings release.
Unless otherwise noted, our margin, net income and earnings comparisons presented today exclude the impact of these discrete items for the fourth quarter and fiscal year. At the end of the prepared remarks, we will open the call to your questions. [Operator Instructions] Now I will turn the call over to Gary Philbin, Dollar Tree's President and Chief Executive Officer.
Gary Philbin:
Thank you, Randy, and good morning, everyone.
Sales for the fourth quarter were strong for both banners. Our results demonstrate the increasing strength of the Dollar Tree brand and accelerated progress on the Family Dollar turnaround as Family Dollar delivered its strongest quarterly same-store sales growth of the year. Our merchants at both banners have delivered a 2019 plan that we believe overcomes the effect of most tariffs at the 25% level and provides opportunity in the back half of the year if tariffs are not increased. In Q3, we had announced plans to renovate at least 1,000 Family Dollar stores in 2019. These renovated stores will include new price impact sections, including $1 Dollar Tree merchandise assortments. Approximately 200 Family Dollar stores will be rebannered to Dollar Tree. We accelerated our Family Dollar closings in Q4, closing 84 stores as we are aggressively optimizing our store fleet to gain traction towards our inflection points. We plan to close as many as 390 Family Dollar stores this year. Excluding the discrete charges, the combined company performed well for the quarter. Our results for the fourth quarter included sales that were $6.21 billion at the top end of our guidance range. Excluding the 14th week from the prior year's quarter, sales increased 4.2%. Consolidated same-store sales increased 2.4%, up from the 1% in Q3. And by segment, the Dollar Tree segment delivered a positive 3.2% comp, and Family Dollar same-store sales increased 1.4%. This was the strongest quarterly comp in 2018 for Family Dollar and on a 2-year stack basis, represented an acceleration of 130 basis points from Q3. On a GAAP basis, diluted loss per share was $9.66. On an adjusted basis, excluding the discrete items Randy outlined for Q4, diluted EPS was $1.93 within the high end of our guidance range. This was an increase over the prior year's adjusted $1.89 per share in the 14-week period. Excluding the $0.21 per share from the extra week in last year's Q4, the adjusted EPS increase was 14.9%. I consider the Dollar Tree brand to be the most unique, differentiated and defensible business model in the U.S. value retail sector, evidenced by achieving our 44th consecutive quarter, that's every quarter since 2007, of positive comps without moving our price point. Customers continue to choose Dollar Tree for the values they are able to get for only $1 for every item, leading our sector in operating margin at 12.8% for fiscal 2018 and delivering extremely consistent gross margin performance. Through all the types of environments and cost scenarios 9 out of the past 10 years, including 2018, Dollar Tree's annual gross margin has been in our sweet spot between 35% and 36%. Values, assortments, categories, product introductions, product specs, have all improved but most importantly, our customer loyalty to the Dollar Tree brand continues to grow. Our merchandising team, which recently returned from another successful overseas buying trip, is second to none in sourcing high-quality, great-value products while managing and protecting price margins. You've heard us say it before, we are in control of our margins even with a fixed price point.
Since the Family Dollar acquisition, we have taken the necessary actions to stabilize the business:
capture synergies in both brands; rebuild the leadership team; introduce and develop a shared services infrastructure; integrate system; create smart ways for our customers to save; improve on store standards; invest in labor and price; and importantly, to repay more than $4 billion worth of debt, earning our investment-grade rating.
We are now at the stage to be able to invest in and reposition the Family Dollar brand for future success through an acceleration of renovations, rebanners and store closings. As demonstrated by our improved sales performance, our strategy to optimize the Family Dollar real estate portfolio is delivering results. We are seeing meaningful improvement in operational performance across the footprint of renovated Family Dollar stores and those that we have rebannered to Dollar Tree. Our fourth quarter comp performance of positive 1.4% was the strongest of the year. We are excited with the results of our renovation program, both with traffic and the diversity of locations. And as announced at the end of Q3, we are accelerating this initiative in 2019. As new and renovated stores become a more significant part of the store base, we expect these stores to contribute more to our top line comps and store sales productivity. Our renovations over the past 2 quarters continue to outperform earlier versions, and we are delivering average comp lifts exceeding 10%. We accelerated store closings of underperforming Family Dollar stores with 84 in the fourth quarter. For fiscal 2018, we renovated 522 Family Dollar stores, rebannered 52 stores to the Dollar Tree brand and closed 122 underperforming Family Dollar stores. Given the results we're seeing from our store optimization initiative, we are confident it will allow us to drive substantial improvement in the quality and performance of the Family Dollar portfolio and create long-term value. In fiscal 2019, at Family Dollar, we plan to complete at least 1,000 store renovations and 200 rebanners. We are further accelerating store closings and expect to close as many as 390 underperforming stores. And because of age, layout, location, unfavorable lease terms or other factors, are not expected to provide an adequate return on investment for the cost of renovation. Final number of actual store closures will be affected by ongoing lease negotiations. Sales highlights for the fourth quarter. Dollar Tree saw balanced increases in both traffic and ticket. At Family Dollar, ticket was up and traffic was down for the quarter. Importantly, Family Dollar's traffic comp improved 120 basis points from Q3. Geographically, all regions for both banners comped positively. Our cadence of comps through the quarter. November represented the softest comp month across both segments. December was the best monthly comp for Dollar Tree as the merchandising team delivered on seasonal assortment and impact. While January was the strongest month at Family Dollar benefiting from a strong start to the month and early release of SNAP benefits. Dollar Tree continues to deliver solid, relatively balanced positive comps in both consumable and discretionary sides of the business. The consumables business drove traffic and sales at Family Dollar with comps exceeding 2.5%. Discretionary sales comped negatively at Family Dollar from -- improved more than 100 basis points from Q3. At Dollar Tree Canada, the team delivered mid-single-digit positive comps for the quarter and for the year, with increases in both traffic and ticket. Traffic was a bit stronger in Q4 than it was in Q3. Consumables comp outperformed discretionary. Top-performing categories included food, floral, beverages and Christmas seasonal. The Canada team achieved its operating income plan for both the quarter and the year. For Dollar Tree Direct, our loyalty club membership now surpasses 1 million members. We produced and mailed 700,000 holiday catalogs to our existing and prospective customers. Dollar Tree Direct is much more than a selling website for us. It's communicating with and enhancing the relationship with our most loyal customers. And we continue to have momentum in our Family Dollar app and Smart Coupon program as more than 8.8 million customers have now opted into the program. Smart Coupons continue to provide our shoppers with the value that builds loyalty and provide us with greater customer insight, allowing to merchandise to them more effectively.
For real estate in the fourth quarter, we opened a total of 143 new stores:
83 Dollar Trees, 60 Family Dollar. We relocated or expanded 14 stores
Before I turn the call over to Kevin, I'd like to provide you an update on tariffs. As I've mentioned on our call last quarter, our merchandising teams for both banners have done an extraordinary job in tariff mitigation. While the increase in Section 301 tariffs from 10% to 25% as of March 1 has been postponed, we will continue to monitor the situation. The outlook Kevin will share is based on tariffs going to 25% as was the expectation when we built our annual business plan in bought product through the back half of the year. If tariffs do not increase, we could see margin opportunity, primarily in the back half. We will provide updates as the situation evolves. Now I'll turn the call over to Kevin to provide more detail on our Q4 and our initial outlook for 2019. Kevin?
Kevin Wampler:
Thank you, Gary, and good morning.
Total sales for the fourth quarter were $6.21 billion, comprised of $3.31 billion at Dollar Tree and $2.90 billion at Family Dollar. Excluding the $406.6 million in sales from the 14th week in the prior year's quarter, sales increased 4.2%. Enterprise same-store sales increased 2.4% on a constant currency basis or 2.3% when adjusted for the impact of Canadian currency fluctuations. On a segment basis, same-store sales for the Dollar Tree segment increased 3.2% or 3.1% when adjusted for Canadian currency, and the Family Dollar's comp increased 1.4%. Overall gross profit for the quarter was $1.91 billion compared to $2.1 billion in the prior year's 14-week quarter. As a percent of sales, gross margin decreased to 30.8% compared to 33% in the prior year. Gross profit margin for the Dollar Tree segment was 37.1% for the fourth quarter, a 90 basis point decline compared with the prior year's fourth quarter. The decline as a percentage of sales was primarily due to 45 basis points of higher occupancy cost deleveraging from cycling the extra week in the prior year's quarter; 35 basis points of merchandise costs, including freight, as higher freight costs were partially offset by improved mark-on and a positive effect of product mix from strong seasonal merchandise sales; and 10 basis points of increased shrink. Gross profit margin for the Family Dollar segment was 23.6% during the fourth quarter compared with 27.6% in the comparable prior year period. The year-over-year decline was primarily due to markdowns, which increased approximately 210 basis points. This increase included a 140 basis point or $40 million reserve for SKU rationalization as well as increased promotional seasonal markdowns and lower mark gain allowances during the quarter. The merchandise costs, including freight, increased approximately 85 basis points, driven primarily by an increase in freight expense, offset by a slightly higher initial mark-on. Occupancy costs increased approximately 45 basis points, primarily due to the deleveraging effect of the additional sales from the 53rd week in fiscal 2017. Shrink increased approximately 35 basis points due to unfavorable inventory results in the current year -- quarter and from changes in the accrual rate. And distribution costs increased 25 basis points. Consolidated selling, general and administrative expenses as a percentage of net sales in the quarter increased 50 basis points to 21.5% from 21% in the same quarter last year. Prior year included a $35 million repayment of a Dollar Express receivable written off earlier in 2017. Excluding the repayment, SG&A as a percentage of sales was 21.5% in the prior year's quarter. Fourth quarter SG&A expense for the Dollar Tree segment as a percentage of sales improved to 20.7% compared to 21.1% in the prior year's quarter. The improvement was primarily due to lower incentive compensation and workers' compensation costs, partially offset by a 20 basis point increase in store hourly payroll expenses resulting from the planned tax reinvestment. Excluding discrete charges, SG&A expense for the Family Dollar segment as a percentage of sales was 22% compared to 20.8% in the prior year's quarter. Excluding the $35 million Express settlement in the prior year quarter, SG&A as a percentage of sales was 22%. Payroll expenses increased approximately 28 basis points, primarily as a result of an increase in store hourly and field management payroll in connection with the planned reinvestment of income tax savings, partially offset by lower incentive compensation and other performance-based compensation. Depreciation and amortization improved 20 basis points when excluding the $10.8 million store-level impairment charges, partially offset by the deleveraging effect of the additional sales from the 53rd week in fiscal 2017. On a consolidated basis, adjusted operating income was $632.6 million compared with $743.2 million in the same period last year, which included 1 extra week. And operating income margin was 10.2% compared to 11.7% in last year's fourth quarter. Operating income margin for the Dollar Tree segment declined 50 basis points to 16.4% when compared to the prior year's 14-week quarter. Adjusted operating income margin for the Family Dollar segment was 3% for the quarter. Nonoperating expense for the quarter totaled $46.7 million, which was comprised primarily of net interest expense. Our effective tax rate for the quarter was 5.1% compared to a benefit of 50.4% in the prior year period. The rate in 2018 is a result of the goodwill impairment charge not being tax-deductible. The prior year benefit was a result of the Tax Cuts and Jobs Act, which totaled a benefit of approximately $583.7 million. For the fourth quarter, net loss included -- including discrete charges was $2.31 billion. And GAAP diluted loss per share was $9.66 compared to diluted earnings per share of $9 -- of $4.37 in the prior year's quarter. On an adjusted basis, diluted earnings increased 2.1% to $1.93 compared to an adjusted $1.89 in the prior year's 14-week quarter. Excluding the $0.21 per share benefit from the extra week in 2017, adjusted earnings per share increased 14.9%. Combined cash and cash equivalents at fiscal year-end totaled $422.1 million compared to $1.1 billion at the end of fiscal 2017. On January 18, 2019, the company prepaid its $782 million term loan facility. As part of the prepayment, the company accelerated $1.5 million of deferred financing costs, which were included in interest expense in the fourth quarter. Our outstanding debt as of February 2, 2019, was $4.3 billion, a decrease of $1.4 billion from the prior year-end. Inventory for the Dollar Tree segment at quarter-end increased 11.4% from the same time last year while selling square footage increased 5.3%. Inventory per selling square foot increased 5.8%. The increase reflects the acceleration of receipt of certain imported goods to minimize the impact of increased tariffs. We believe the current inventory levels are appropriate to support the scheduled new store openings and our sales initiatives for the first quarter. Inventory for the Family Dollar segment at quarter-end increased 11.7% from the same period last year and increased 10.8% on a selling square foot basis. Capital expenditures were $194.4 million in the fourth quarter versus $182.8 million in the fourth quarter of last year. For fiscal 2019, we are planning for consolidated capital expenditures to be approximately $1 billion. Capital expenditures will be focused on 550 new stores, 350 of which will be Dollar Tree, 200 Family Dollar, along with at least 1,000 Family Dollar renovations and 200 rebanners; the addition of frozen and refrigerated capability to a total of 500 new and existing Dollar Tree stores; the expansion of frozen or refrigerated capability to 400 Family Dollar stores and the addition of adult beverage to 1,000 stores; IT system enhancements and projects; installation of LED lighting in approximately 3,000 stores; and the completion of construction of a new Dollar Tree banner distribution center in Morrow County, Ohio; as well as the start of construction of a new DC 16; and additional automation projects. Both new DCs will have co-banner capabilities. Depreciation and amortization totaled $166.7 million for the fourth quarter. Depreciation and amortization expense was $156.6 million in the fourth quarter last year. For fiscal 2019, we expect consolidated depreciation and amortization to range from $635 million to $645 million. Our initial outlook for fiscal 2019 includes the following assumptions. Our guidance is based on the expectation that Section 301 tariffs would move to 25% on March -- in March of 2019. If these tariffs do not move to 25%, we expect to see margin benefit in the second half of fiscal 2019. Calendar considerations for the year include the following. Easter will be 3 weeks later in 2019, which should benefit Q1 sales. And there will be 6 fewer selling days between Thanksgiving and Christmas, which will negatively impact Q4 sales. Our guidance does include expenses in connection with the effects of our store optimization program. It does not include charges for lease obligation expense for any closed stores, which would be negotiated in fiscal 2019. We expect to incur $37 million rotated -- related to consolidated -- consolidating our store support centers. And we expect continued pressure on store payroll based on competitive markets and states increasing minimum wages. We expect the year-over-year freight costs as a percentage of sales to increase in the first half of the year and then flatten out in the second half. Diesel is currently expected to be a benefit for the year. Net interest expense will be approximately $41.5 million in Q1 and approximately $153 million for fiscal 2019. We cannot predict future currency fluctuations, so we will not adjust our guidance for changes in currency rates. Our guidance assumes a tax rate of 22.9% for the first quarter and 22.6% for fiscal 2019. Weighted average diluted share counts are assumed to be 239.1 million shares for Q1 and 239.4 million shares for the full year. For the first quarter, we are forecasting total sales to range from $5.74 billion to $5.85 billion and diluted earnings per share to range of $1.05 to $1.15. These estimates are based on a low single-digit same-store sales increase. For fiscal 2019, we are forecasting total sales to range from $23.45 billion to $23.87 billion based on a low single-digit same-store sales increase and approximately 1% selling square foot growth. The company anticipates GAAP net income per diluted share for the full fiscal year 2019 will range between $4.85 and $5.25, which includes costs of $95 million or $0.31 per share. Diluted earnings per share in fiscal 2019 are also burdened by approximately $0.18 due to the expected tax rate being 22.6% as compared to 19.9%, excluding the goodwill impairment charge in fiscal 2018.
The $95 million in discrete costs are related to the following initiatives:
$37 million of store support center consolidation costs; $30 million of incremental initiative costs based on project count and velocity; and $28 million of store closure costs, which as noted, does not include any lease obligation expense we would negotiate. These discrete costs are expected to be incurred disproportionately as approximately 75% will be incurred in the first half and 25% in the second half of fiscal 2019 as the company targets completing the majority of initiative projects by the end of August 2019.
Due to the costs associated with these initiatives, year-over-year operating income is expected to be lower in the first half of fiscal 2019, but it is expected to show material improvement in the second half as these initiatives gain traction. Additionally, we believe that these initiatives will drive business and provide a platform for an accelerated improvement in earnings in fiscal 2020 when the company's earnings per share is expected to grow 14% to 18% over reported fiscal 2019 earnings per share. I'll now turn the call back over to Gary.
Gary Philbin:
Thanks, Kevin. Before I turn to Q&A, I'd like to highlight the continued progress we're making to Family Dollar.
On the Q3 call, we shared an update on the integration process, our success in building a common foundation across the Dollar Tree and Family Dollar banners, and our development of the renovation model that is generating the returns we are looking for. We have since received very positive feedback from many investors, and we are confident we are on track to reach an inflection point as we continue to optimize the store fleet of Family Dollar throughout 2019. In addition to synergies, it's important to recognize the profound impact that Dollar Tree and Family Dollar brands have had on each other and the meaningful value this creates for our shareholders now and into the future. But the benefits from the merger have not just been for the Family Dollar brand. Dollar Tree has benefited, too. The stores we have rebannered from Family Dollar are performing well and have improved Dollar Tree's overall profitability, a trend that should continue as we rebanner more stores. And the Dollar Tree banner has also benefited from indirect procurement. We estimate we have saved more than $55 million. We've also used our scale of more than 15,000 combined stores to drive merchandise cost savings, exceeding $70 million. At Family Dollar, we've driven more than $145 million in estimated savings for indirect procurement and more than $100 million in cost of sales. In particular, as a result of our scale, we have decreased Family Dollar's initial merchandise costs by approximately 153 basis points since 2015. The lower merchandise costs have allowed us to partially offset higher distribution costs, shrink, and higher freight and fuel costs. Overall, at Family Dollar, we have taken the savings and reinvested in the business to drive traffic and loyalty by lowering prices at stores and increasing staffing to improve shopper experience. Our portfolio optimization strategy is generating performance improvements across Family Dollar. And we are accelerating the program in fiscal 2019 and beyond. We have identified high-performing stores, the stores that will benefit from renovation; and underperforming stores, some that can be better as a Dollar Tree and others that because of age, layout, location, unfavorable lease terms or other factors, may not benefit from either. These are what we have grouped to potentially close. As I noted earlier, we have developed and tested a new model for renovated Family Dollar stores, which we are calling H2. I spoke about this on our previous call, but I want to give you a little more color on why it's performing so well. Our H2 model has better shopping adjacencies; more productive end caps; a greater number of freezers and coolers, which allow us to offer more consumables and better serve the midweek shopping fill-in needs of our customers. This performance has also been enhanced by the introduction of Dollar Tree $1 merchandise throughout the store. This last touch has been very successful in driving traffic to these stores, many of which are in rural locations where a Dollar Tree would not be as successful. Our H2 stores are generating increased traffic and strong comp store sales of in -- comp store sales of in excess of 10% over controlled stores with actual comp store sales in excess of 13%. This new design has shown strong performance in a variety of locations, but especially in locations where we have been the most challenged. As we said in November, we plan to renovate more than 1,000 of these stores in 2019 with an accelerated schedule on future years. We also plan to rebanner approximately 200 Family Dollar stores to Dollar Tree stores this year, opening 350 new Dollar Trees and 200 new Family Dollars. We will be accelerating our store closings in the fourth quarter of 2018 with the 84 stores that we mentioned. In 2019, we will close as many as 390, subject to ongoing lease negotiations. This higher level of store closures in Q4 and anticipated store changes in 2019 result in $40 million in incremental markdowns during the quarter. However, in conjunction with our new store openings, our renovations and conversions to Dollar Tree, we are confident that these actions will result in improved portfolio of Family Dollar stores that will set the stage for stronger, long-term performance. In addition to optimizing the Family Dollar portfolio, we plan to add adult beverage in approximately 1,000 stores, expand freezers and coolers in 400 stores and continue to improve the Family Dollar merchandising strategy. Some of these improvements will not be implemented until the middle or end of 2019, but we believe we will demonstrate the potential of Family Dollar by the end of 2019. We are keenly focused on a proposal to enhance future value creation for our shareholders. As our long-term investors know, we have never been shy of testing different options at Dollar Tree. We have explored introducing multiple price points in the past, ranging from our Oops test to our larger experiment we ran with Dollar Tree deals. And as you can see, with our H2 renovations at Family Dollar, we've effectively tested the opposite, introducing a broader range of dollar price point items to the multi-price point format. The fact is, the model works very well. Dollar Tree, one of the most unique, differentiated, defensible models in value retail, has an extremely loyal customer base. And our previous testing of this concept has demonstrated that everything is $1 is an incredible, powerful part of our value proposition and lets us drive industry-leading margins, delivering 44 consecutive quarters of positive same-store sales. To be clear, our efforts over the long-term have been to protect and grow the brand, deliver the WOW factor for our customers and increase value to our shareholders, part of what is regularly taking a look at that idea and introducing multiple price points at Dollar Tree. We are open to testing again. And the fact is, with where we are in the integration of Family Dollar, our co-banner DCs afford us the capability to do so. And so we are thoughtfully and carefully planning our tests in specific locations serviced by our co-banner DCs. Our initial efforts will be to test unique assortment within these Dollar Tree stores, understand our customer research and develop a scalable model. As always, our brand is our most valuable asset around any test we do. All I can say for now is more to come on this. We are also benefiting from the initiative we took to upgrade our Family Dollar private brand program. In Q2 of 2018, we completed the rollout program of moving away from Family Gourmet and Family Dollar brands to introduce products under a range of private brands, including Catawba Candy, Chestnut Hill, Driver's Choice, Tool Bench, Nature's Measure and many others. As a result of these improvements to our private brand program, the growth in these categories has been strong, driving both top line sales, improved margins and customer loyalty. I want to give you a brief update on our integration of support functions. With the primary exception of merchandise, store operations and loss prevention, all other functions in the departments have been fully integrated. This includes, with some minor exceptions outlined in the press release, real estate, supply chain, strategic planning, global sourcing, all IT function strategy and operations support, finance, human resource, inventory management and legal departments. To date, this has resulted in savings of over $50 million. We are continuing to make great progress on the consolidation of bringing all these teams together under one roof with our new support center in Chesapeake, Virginia this last piece of the integration, which will improve our ability to support both banners through enhanced collaboration, communication and teamwork. We expect that to be completed by July and will generate an additional $15 million in savings once complete. Regarding our capital allocation plans. As you know, we maintain a responsible approach to capital allocation to position the company for future success. Since the acquisition, we have well outperformed our synergy targets and have made significant debt paydowns, including $782 million term loan facility in Q4, for a total of approximately $4.3 billion since completing the acquisition and earned investment-grade ratings from both S&P Global and Moody's. Moving forward, we believe we'll generate sufficient free cash flow to cover our investment needs. The company has an existing $1 billion board authorization to repurchase shares, and we'll continue to evaluate share repurchase in 2019. And we will continue to assess capital allocation with share buyback opportunity ahead of us. This quarter's results, along with a broader work to improve performance at Family Dollar, give us confidence that our strategy of thoughtful planning and careful execution will drive value for shareholders over the long term. We do this with the support of our highly engaged and recently refreshed board, now 5 new independent directors in the last 2.5 years. We will continue executing on our plans so that all Dollar Tree shareholders realize the substantial value that is being generated by our prudent investments in the future of our company. All of this progress would not be possible without the hard work and dedication of each and every one of our associates. While we have continued the integration and refinement of our Family Dollar banner, our supply chain teams have worked hard to overcome a year of unusual external costs and service issues. Our merchants have continued to find incredible values. And our 15,000-plus store teams have focused on our customers, delivering a great Q4 sales result. Our success would not be possible without them, and we thank them for their commitment and support to our common vision to be the winner in value retail. Operator, we're now ready to take questions.
Operator:
[Operator Instructions] Our first question comes from John Heinbockel with Guggenheim Securities.
John Heinbockel:
So, Gary, obviously, '19, we just started here. But when you think about your '20 sort of outlook, that does not include buyback, correct? And it is based off of the $4.85 billion to $5.25 billion guidance as we sit today. Is that correct?
Gary Philbin:
That's right, John. With the emphasis being around -- we talked about this being a first half, second half of '19. And really, because of the investment of what we have to do on the rebanners, close the stores in the first half, get the H2 renovations going. We want to give a little color on our confidence in the plan, then trajectory, you'll see in the back half. And to complete the painting of that picture, we want to give some sense of what we expect on guidance as we look as far on to '20. And exactly to your point, it includes that coming off of our guidance that we gave this morning, the $4.85 billion to $5.25 billion.
John Heinbockel:
And as a follow-up to that, the -- do you look at '20 and maybe even beyond, significant recovery at Family Dollar? Or are we sort of implying high single digit, maybe a little better EBIT growth at Dollar Tree?
Gary Philbin:
Well, Dollar Tree, of course, is performing at a high level. So we continue to see the Dollar Tree leverage being -- it's always about our top line, our margins. We've -- even in this year, you take the backdrop of both tariffs and freight, we've been able to manage through this year, I think, a kind of level that I'm proud of our team. It delivers to the bottom line as we drive more footsteps into our stores. So Dollar Tree is always about driving more footsteps and to drive the top line comp. And that delivers the four-wall EBIT that drives down to the enterprise. But Family Dollar's recovery is exactly what we've described, the first half and second half trajectory, with the second half picking up steam. And as I would call out, that we will continue to plan on doing additional H2 renovations into '20 and beyond to get to the inflection point that we see, which is changing this fleet of stores, one store at a time. So it's a combination of Dollar Tree firing on all cylinders like we have been. And we are going to change the trajectory of Family Dollar stores at the renovation program and the other initiatives that we called out, too, that speak to some of the assortment in adult beverage and the other categories.
Operator:
Our next question comes from Karen Short with Barclays.
Karen Short:
Just want to ask a little bit about Family Dollar H2. I mean, obviously, you are very committed to fixing the business. So what obviously matters to everyone on this call is what the EBITDA margins profile could look like going forward. So can you maybe talk a little bit about what you're seeing in terms of the H2 EBITDA margin profile as a start?
Kevin Wampler:
Karen, this is Kevin. As we look at it, obviously, the points we've given you today are really about the top line growth. And as you heard Gary talk about the fact that we're seeing lifts in these stores of over -- of, on average, 10%. And then, obviously, then it's -- it really relates back to what does that drive. And it's going to drive a better operating income. It's going to drive a better EBITDA margin at the end of the day. We haven't really given any metrics around that. Everything we've built in, again, is built into our guidance. And again, you got to remember, at this point in time, it's about investments, especially in the first half, as we talked about the fact that the costs are front-end loaded with 75% being occurred within the first 2 quarters. And in particular, Q2 will be affected more than in Q1 just based upon the number of projects and the pace of things, especially around if we look at other things beyond that, we look at store support center consolidation as well as store closures. So a lot of those things will be happening, be affected in the second quarter. As we go forward, though, obviously, there is an expectation from an EBITDA margin to grow in the Family Dollar business. And again, get back to something of a more historical nature. And I don't think we've changed on -- in that manner, our thought process really from day 1 to just the new model, the new renovations, and driving that forward along with the other initiatives we've got going on.
Karen Short:
Okay, and that's helpful. And then just on the tariffs. So obviously, your guidance assumes or reflects 25% implemented in March. So any way you could help give some color on what the actual impact is to earnings from that? And then, I guess the second part of that is, the 10% may not -- may be removed as well. So any way to think about how your numbers or guidance might change if 25% doesn't happen and 10% also gets removed?
Gary Philbin:
So Karen, it's a good point. We are trying to follow the same progress everyone else does. But we built the plan assuming 25% was going to be in for the full year, and that's in our guidance. If 25% comes down, obviously, it says we're going to have some savings in the back half where we bought our product and as we went over in January of this year. I guess the way I think about it, is there upside? Yes. As always, we're going to manage in real time because it's all about footsteps at both banners, what do we need to invest in the right product at Dollar Tree, what's the right retails potentially at Family Dollar. We went into this knowing that this year was a potential of $100 million at Dollar Tree as a potential of tariff impact and $40 million at Family Dollar. We mitigated most of that. I'd say most because when the 25% was announced, lots of items were already on the water. So some of that impact is in the first half versus what we were able to negotiate in the back half. That will all fall to the bottom line, but it gives us an opportunity to invest in the business as we see tariffs change from 25% to 10% or 10% to 0.
Operator:
[Operator Instructions] Our next question comes from Scott Ciccarelli with RBC Capital Markets.
Scot Ciccarelli:
So, Kevin, you just talked about no real change in how you're thinking about Family Dollar's future profitability. But you guys also just took a $2.7 billion goodwill write-down. So I guess I'm just trying to reconcile those 2. And have there been any changes regarding the future profitability potential at Family Dollar?
Kevin Wampler:
Well, understand, Scott, that the goodwill impairment is a function of an accounting process at the end of the day and it's at a point in time. And so as we've looked at our strategic and operational plans going forward and really built this plan around all the initiatives that we've spoken about this morning, those things will have the effect of improving the business. But at this point in time, as you look at it and you kind of create the new baseline, which was really this year -- 2018's financial results, you do a calculation based at that point in time or as needed. So I don't think that -- from my perspective, that doesn't change our view of the future and the value that can be created with the Family Dollar segment. So that hasn't changed. And I guess really -- that's really my comment, that's what I said from the -- our view of the long-term position.
Scot Ciccarelli:
Got it. I understand. And hopefully just a housekeeping item. Is there any assumption built into your earnings guidance for the multi-price point test at Dollar Tree?
Gary Philbin:
Scott, Gary. No, it's not -- listen, we wanted to give you a sense of how we think about our testing. And as a management team, you've heard us in the past talking about some of them. Others never made the light of day, but listen, this is something that we are going to be very smart about. We have some insights from our past tests that we've done. But there's nothing in guidance. And listen, we'll report on it as we see it's something that we need to report on.
Operator:
[Operator Instructions] Our next question comes from Chuck Grom with Gordon Haskett.
Charles Grom:
I was wondering if you guys can just discuss the improvement at the Family Dollar segment here in the fourth quarter and, I guess, your confidence in the sustainability of that. And the reason I ask is over the past couple of years, you've had some good quarters at Family Dollar, some softer quarters. Just curious, your confidence in the improvement. And then as a follow-up to that, Gary, just on the decision to test the multi-price points. How extensive is that going to be? Is there -- is it the number of SKUs you're going to be testing? Is it going to be measured by the number of stores? And then just ultimately, just why now? Why the decision to do it?
Gary Philbin:
Sure. Look -- listen, we had a good Q4 at both banners, Dollar Tree and Family Dollar, with the comp. The confidence in the business, listen, we've renovated 585 stores last year, as we've said before. Only 200 and change of those were the H2s. What the H2 has changed is really the footsteps into those stores. And that's why it gives us confidence in the model across the demographics, locations, competitive sets, the ability -- well, our technology has allowed us to do now to be able to put Dollar Tree product easily into the Family Dollar stores. That's what gives me confidence. But the comp for the fourth quarter was really all boats rising. It's the things that we're doing every day at Family Dollar to drive the business. So it was a good Q4. And what I was pleased with was the important December time frame where we invested in categories, toys, like a lot of folks did. We had a strong toy category season. The consumables, which we've always talked about, being the bellwether of what we try to track on what our customers need most, are doing well. So what's ahead of us are more H2s. And it changes the foot traffic because it's more of what our customers need across the categories. And while the previous renovated stores are doing okay, what the H2 stores deliver are higher footsteps, a modest increase in basket. But it's really about our customers coming in and gaining -- shopping more of the aisles and then -- and seeing more of the categories and more of the dollar price points, and along with some of what we're doing with the WOW tables and queuing line. So it's a nice combination to drive in the customer with what she needs and what she wants. And it reflects a lot of the impact that we can do over the years that we've seen with Dollar Tree on season. And now you have the ability to spread out that price point. For the multi-price point, here's how I'd like you all to think about it. Listen, we have an ability now from -- to easily get into some product that our Family Dollar merchant team buys. We're over together in the same factories. When we travel to Asia, we work in the same office. That's really where the rubber hits the road in terms of identifying these WOW items. And so when I think about how are we going to test the multi-price item, what's that mean at Dollar Tree when we've done it before, well, here's an opportunity to select items, especially around high-value items that we see when we're together on import trips, something different that would complement Dollar Tree. And what's success in this? Well, listen, let's protect the brand. I mean, Dollar Tree to me is so unique. It cuts through. It clarifies for our customers. I've received plenty of letters and emails from customers that tell us exactly that. It doesn't mean we shouldn't test though. And we're going to go into this with the thought that, listen, why now? Because why wouldn't we do it now? We've always been a company that tests and learns. And we're open to ideas that -- good ideas that work. And success for this is adding to the brand and developing something that our customers still say, "I go to Dollar Tree because of that wow factor." And listen, the customers won't tell us exactly what it is they see, feel. We'll be all over this thing as we test and learn as we go forward.
Operator:
Our next question comes from Paul Trussell with Deutsche Bank.
Paul Trussell:
I wanted to first ask maybe for a little bit more color on the guidance, maybe particularly as we look at the first quarter. Could you help us better understand what you are assuming from a SNAP headwind, given the pull-forward in timing along with assumptions around the initiative-related costs? Should we see continued markdowns, deleverage on occupancy? Just maybe hold our hands a bit more there, Kevin.
Kevin Wampler:
Paul, as we work through the plan and put our guidance together, again, the biggest differential year-over-year is obviously the initiatives and the pace of initiatives and the costs, not just the number of projects, but as we've said, we now have the store closures as well as the store consolidate -- or the store support center consolidation. So those costs as well. As we've said, the costs that we called out, really 75% being incurred in the first half roughly as we look at it today. And again, I would tell you, of that, it's really a 1/3, 2/3 type of situation between the first quarter and the second quarter because, as I said, second quarter gets impacted much more, it's just based upon the timing of various aspects of that. And so what do you see? You do see -- basically, you do see the effect of some additional markdowns as we go through the renovations, right? We basically have to move some inventory. There's things -- some things that we discontinue to make room for the $1 products. So to your point, markdowns will continue to be a big piece of that. The other thing you see from a cost perspective is labor. The other piece of this is we have to have teams that go across the company and do these resets. And so they have that as well as their travel and things like that. So those are a couple of the big buckets of costs. And so I think that's important. And then, obviously, this past year, we had the reinvestment in labor again. So that was a -- we'll call that a onetime investment. But again, as we know, the states continue to increase their minimum wage, so we'll see some pressure from that as well. As far as SNAP, we did see a benefit in January from the movement of February SNAP to about January 20. I think we -- our calculation would tell you is was about a 30 basis point -- roughly a 30 basis point benefit to the quarter for Family Dollar. And I think that's pretty much in line with what you've heard probably from some other retailers as well. But again, I think what our viewpoint is, is we'll go forward. And we got a late Easter, which we think that is beneficial. It's a little more beneficial typically to Dollar Tree than Family Dollar. But it is typically a good time frame when we get that late Easter and get that warmer weather and get people into the stores and kind of broaden the product that's there for them to look at. So those are just some of the backgrounds, some of the color we've got going on in Q1, Q2 as we go forward.
Paul Trussell:
And my quick follow-up is just around store plans. You have an aggressive plan in place, around 1,000 -- at least 1,000 remodels this year. But you mentioned in the press release that, that might accelerate further over the following years. So maybe just touch base on how we should think about what percent of the total fleet could ultimately get this remodel. And how does that impact your thought process around opening up new doors and still being a square footage growth story?
Gary Philbin:
Paul, Gary. I think you're exactly right. We called in 1,000 in the cadence this year. And why the impact is in the first half, I want to get these things done no later than somewhere in Q3. And if we can end up doing more of them, we'll try to do that. But the 1,000 is based on us getting it done primarily in the first half -- it'll go into Q3, but we need to get more stores behind us. And I would -- we're not ready to call on capital next year, but it's -- certainly, I can see 1,000 next year as well. We are touching a lot of stores, not just Family Dollar, but Dollar Tree stores, too, which we haven't talked much about. But with our Snack Zone delivering a nice comp in the stores that we're putting that in, we're touching 1,000 Dollar Tree stores, too, to drive top line business and bottom line performance. So we have a lot of human capital extended this year. And my sense as we go into the out-years, we'll start to ramp up store count at Family Dollar because we're going to like this H2 and not just because of performance, it will also help what we do on our comps as we get more new stores behind us. So I would see -- not ready to declare '20, but I would say it's going to be a similar renovation count. And I'm going to see some additional new stores as we look out into '20 to say how we -- that's the growth factor in places our Family Dollar stores perhaps have been most challenged. And let's put an H2 store in some of the greenfield areas that we can grow the business. So this is a business that we have -- we're focused on. We're going to fix it and we're going to grow it. And that's what this initiative is all about.
Operator:
Our last question comes from Kelly Bania with BMO Capital.
Kelly Bania:
First, I just wanted to ask on the cost of the H2 remodels. I believe the prior remodels were around $100,000 and $150,000. I'm wondering if that's gone up with the incremental lift there. And then just had another follow-up as well.
Kevin Wampler:
Yes. The cost, again, I think we spoke to this last quarter, it really kind of ranges between $100,000 to $150,000. And again, the variables affecting that are the number of freezer coolers we may be adding as well as, in some cases, if it's an older store, there may be some deferred maintenance that we're also addressing as well as we go through the process. So that's still our general range on a cost basis.
Kelly Bania:
Perfect. And then just another one, I guess, on the multi-price point test. Maybe just can you remind us what you have found in the past as you have tested these, what you did and didn't like and what you're specifically looking for this time? And how long you expect to do this test?
Gary Philbin:
Kelly, you're probably asking more than I can answer. But I would say what we saw in both Oops and Dollar Tree -- remember, Deals was a single-price point banner, and then we converted it to some multi-price. And in fact, we took some Dollar Trees along the way and added that to a Dollar-Tree-Deals format. So what's the takeaway? Our customers are very loyal to what Dollar Tree represents, we all know that. It's a brand. It's not just price and item. It's a brand that they can count on as they walk through the door. And so between what we marketed, how we showed it in-store, the categories that we put it in, how our customers shop, different categories and adjacencies, those are all the things that we captured with the other tests that gave us insight. And as we go into this, we take some of those learnings just to say, "Let's be as smart as we can in what we're trying to achieve in terms of success." And I can't put a time line on it for you. I mean, this is a test and learn. You do something, you tweak it, and you change it. So those -- that's just been really the discipline we bring to, to make sure we understand what is it we're doing, what's our customers seeing. And quite frankly, the customer research. At the end of the day, it tells us what our customer sees on this. So more to come. I'm just not -- we'll go into this with the eyes wide open, based on what we've done in the past, and do it in a very disciplined, logical way.
Operator:
Thank you, everyone. This concludes today's question-and-answer session. I will now turn the conference back over to Mr. Randy Guiler.
Randy Guiler:
Thank you, Britney. And thank you for joining us for today's call and for your continued interest in Dollar Tree and Family Dollar. Our next quarterly earnings conference call to discuss Q1 results is tentatively scheduled for Thursday, May 30, 2019. Thank you, and have a good day.
Operator:
Thank you, everyone. This concludes today's teleconference. You may now disconnect.
Operator:
Good day, and welcome to Dollar Tree's Third 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.
Randy Guiler:
Thank you, Brandon. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the third fiscal quarter of 2018. Participating on today's call will be our President and CEO, Gary Philbin; and our CFO, Kevin Wampler.
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, 8-K, 10-Q and annual report, 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. [Operator Instructions] Now I will turn the call over to Gary Philbin, Dollar Tree's President and Chief Executive Officer.
Gary Philbin:
Thank you, Randy, and good morning, everyone. Today, we're going to discuss our third quarter performance as well as our plans to improve the consistency of execution across the Family Dollar store base and to optimize our real estate portfolio. This will include a meaningful acceleration in -- of in-store renovations and rebanners in 2019.
This morning, we announced results for the third quarter. Sales increased 4.2% to $5.54 billion. Consolidated same-store sales increased 1%. By segment, comp sales for the Dollar Tree banner increased 2.3%. The Family Dollar banner comps were down 40 bps compared to last year's Q3 increase of 1.5. On a 2-year stack basis, comps accelerated slightly. Our enterprise gross margin rate declined 110 basis points to 30.2%. Operating income was $387.8 million or 7%, and diluted earnings per share increased 16.8% to $1.18 at the high end of our guidance range. We delivered earnings within the range of our expected -- of our expectations, despite continued cost pressures related to domestic freight and our investment in store wages. Dollar Tree delivered its 43rd consecutive quarter of same-store sales growth with increases in both customer transactions and average ticket. We're pleased with the performance of our newly renovated Family Dollar stores. Additionally, we have begun the important phase of consolidating our store support centers into our Chesapeake campus, which will improve our ability to support Family Dollar stores through enhanced collaboration, communication and teamwork. Dollar Tree continues to have the most unique, differentiated and defensible business model in U.S. value retail. Customers love our dollar fixed price point, as demonstrated by 43 consecutive quarters of positive comps. Despite periodic cost challenges, the company has continued to deliver a relatively consistent gross margin annually with sector-leading operating margin. Our 2.3 comp this quarter was on top of a 5.0 comp in last year's third quarter, and the comp growth was driven by balanced increases in both transaction count and average ticket. In our Dollar Tree banner for the third quarter, top-performing categories were snacks and beverage, candy, stationery, greeting cards and Halloween seasonal assortment. We are extremely pleased with the recent addition of the Hallmark brand to our product assortment at Dollar Tree. Customers are thrilled with the values and the offering, and I'll touch more on that in a moment. Sales performance was driven by strength in discretionary categories. Comps were positive and exceeded 1.5% in all 3 months. October same-store sales were the strongest month in the quarter, and we saw a terrific sell-through on our Halloween seasonal merchandise. Geographically, Dollar Tree same-store sales growth was strongest in the west, southwest, southeast, and all of our operating zones delivered positive comps. On last quarter's call, I briefly touched on our beginning -- of our new partnership with Hallmark. We introduced a new Hallmark greeting card program in June. Every Dollar Tree store in the fleet was refixtured and merchandised with a fantastic, new assortment. The rollout across the chain was completed 1 week ahead of schedule, and our customer acceptance and feedback has been terrific and was validated by a double-digit comp in our third quarter. We are able to enhance the assortment by market and store. We have cards tailored for African-American shoppers, our Hispanic shoppers, religious, inspirational card occasions. We have fantastic every day and seasonal assortments with our Heartline brand and our best price at 2 for $1 and our Expressions brand for $1 per card. All are branded with the signature Hallmark brand and recognizable crown logo. We are enthusiastic about this new partnership with Hallmark, and it adds to our very important party category. Also, during the quarter, we added new Snack Zones into an additional 300 stores. We now have Snack Zones up and running in more than 800 stores. Store and customer feedback has been terrific, and our numbers support this as we like the lift not just from the category but within the store. The concept targets on-the-go customers with immediate consumption items, and our Snack Zone sales are consistently outperforming the budgets assigned to them. These are just 2 examples of how Dollar Tree continues to reinvent our assortment to drive excitement in our stores. For the Family Dollar banner in the third quarter, since acquiring our Family Dollar brand, our team has made progress towards addressing needed investments, but there's more to be done. While comps for the quarter across the banner as a whole did not meet our targets, our renovated stores continue to perform ahead of our expectations. In fact, in the third quarter, we are seeing that the performance of our newly renovated stores are the best performing of our renovation waves over the past 6 quarters. These strong results give us the confidence that we're poised to see the benefits of our investments in the brand, and we continue to focus on the key initiatives that will drive to long-term success. The foundational elements that we have stated from the beginning are investment in customer experience; being better in stocks and assortment; more private brand offerings, along with better buying from our import capability; delivering value to our customers through our Smart Ways to Save; specific customer offers through our Smart Coupon program; and now, most importantly, around our efforts to renovate the stores with better adjacencies and the impact of our important categories. I'll provide more detail on these efforts later in this call. Top-performing categories during the quarter included snacks and beverage, refrigerated, frozen products, candy, beauty care and laundry care. We delivered our eighth consecutive quarter of positive comps in the Family Dollar consumables businesses. Sales cadence comps were slightly negative in August and September and slightly positive in October. In the prior year, all 3 months were greater than 1% positive comp. Geographically, Family Dollar same-store sales growth for the quarter was once again strongest in our west, mountain west and mid-Atlantic zones. Switching to Dollar Tree Canada. The team, again, delivered mid-single-digit positive comps for the quarter with increases in both ticket and traffic. The sales growth was balanced as both discretionary and consumables comped at or better than 4% for the quarter. Top-performing categories included harvest, apparel, greeting cards. Importantly, team Canada achieved its operating income for the quarter. The digital division of Dollar Tree, Dollar Tree Direct, had another productive and profitable quarter in Q3. We experienced comp sales growth in our e-commerce sales for -- are increasingly profitable as we continue to, over time, leverage the existing infrastructure to drive to the bottom line. Online, we launched a robust marketing campaign to promote Hallmark cards in the stores. The campaign included a landing page, dedicated Hallmark video and craft ideas featuring our cards. Now looking at real estate. In the third quarter, we opened a total of 127 new stores, 87 Dollar Trees and 40 Family Dollars. We relocated or expanded 14 stores, 10 Dollar Trees and 4 Family Dollars. We renovated 164 Family Dollar stores as part of our renovation initiative. We rebannered 30 former Family Dollar stores to Dollar Tree stores for a total of 335 projects during the quarter. We have completed 488 Family Dollar renovations in fiscal 2018, exceeding our original target of 450 for the year. We also added freezers and coolers into 143 Dollar Tree stores during the third quarter, bringing our total Dollar Tree stores with freezers and coolers to 5,579. During the quarter, we closed 18 stores, 6 Dollar Trees and 12 Family Dollars, and we ended the quarter with 15,187 stores. Broken out, 6,923 Dollar Trees and 8,264 Family Dollars. For the full year, we expect to have 325 new Dollar Tree stores and approximately 230 Family Dollar stores. This is below our original plan of 350 Dollar Trees and 350 -- or 300 Family Dollars. The shortfall is due to timing on the Dollar Tree side and our accelerated focus to renovations on the Family Dollar side. We have mentioned previously our effort to switch to do more renovations at Family Dollar, and by our fiscal year-end, that number will be at 500. Before I turn the call over to Kevin, I'd like to provide an update on the Section 301 tariffs and the potential for additional tariffs. Today, we currently source our products from more than 2 dozen countries, which does afford us a degree of flexibility. But I'm extremely proud of the work our merchandising teams, which have been very active, working with our supplier base to minimize our impact from tariffs. Because of our team's efforts, the expected impact on tariffs to fiscal 2018 will be minimal. As we've always said, with visibility and [ due cost ] and with some amount of time, we're typically able to navigate and manage the business for ways to offset these costs. Our options include negotiating price concessions from vendors, changing product sizes, specifications and evolving our product mix. At Family Dollar, we can raise retails but only as a last resort. Assuming that 10% Section 301 tariff for freight will increase to 25% next year, Dollar Tree has already mitigated the potential impact of the 2019 tariffs by 80% and Family Dollar by 50%. We have made significant process (sic) [ progress ] and will provide additional updates on our fourth quarter call. Now I'll turn the call over to Kevin to provide more detail on our third quarter performance and for our outlook for the remainder of fiscal 2018. Kevin?
Kevin Wampler:
Thank you, Gary, and good morning. Total sales for the third quarter grew 4.2% to $5.54 billion. Dollar Tree segment total sales increased 6.3% to $2.85 billion. The Family Dollar segment total sales increased 2% to $2.69 billion. Enterprise same-store sales increased 1%. On a segment basis, same-store sales for the Dollar Tree banner increased 2.3% or 2.2% when adjusted for Canadian currency fluctuations, and the Family Dollar banner decreased by 40 basis points.
Overall, our gross profit increased by $5.9 million or 0.4% to $1.67 billion for the third quarter 2018 compared to the prior year's quarter. As a percent of sales, gross profit margin declined 110 basis points to 30.2% versus 31.3% in the prior year's quarter. Gross profit margin for the Dollar Tree segment was 34.8% for the third quarter, a 30 basis point decline compared with the prior year's third quarter. The decline was primarily due to higher costs related to distribution center payroll and shrink. Increases in freight were offset by improved markdown and a positive margin effect from mix shift based on strong discretionary sales for the quarter. Gross profit margin for the Family Dollar segment was 25.3% during the third quarter, which compared to 27.5% in the comparable prior year period. The year-over-year decline was primarily due to merchandise costs, including freight, which increased 60 basis points, resulting from higher domestic freight costs. 11 basis points of that increase relates to hurricane-related costs incurred due to our Marianna, Florida DC being down due to the loss of power and store cleanup. Stores normally serviced by this DC were moved to other DCs in the network for approximately 3 weeks, increasing stem miles and costs. Markdowns increased 50 basis points related to promotional markdowns. Approximately 10 basis points of the increase was due to damaged inventory in our Marianna DC and multiple Florida-based stores. Shrink costs increased 40 basis points due to unfavorable inventory results and changes in the accrual rate. Distribution costs increased 40 basis points due to higher distribution center payroll-related costs and a change to allocate certain benefit costs related to the DC to be consistent across banners. This represented 25 basis points of the increase, and occupancy costs increased 30 basis points, resulting from the deleveraging effect of the decline in same-store sales. Consolidated selling, general and administrative expenses as a percentage of net sales in the quarter improved 10 basis points to 23.2% from 23.3% in the same quarter last year. The increase was driven by lower corporate and operating expenses and lower depreciation as a percentage of sales, partially offset by higher payroll costs. In addition, the third quarter includes $2.3 million of expense related to the store support center consolidation announced September 18, 2018. Third quarter SG&A expense for the Dollar Tree segment as a percentage of sales improved to 23.2% compared to 23.3% in the prior year's quarter. The improvement was primarily due to leverage from the increase in same-store sales and lower incentive compensation costs, partially offset by a 20 basis point increase in store hourly payroll expense, resulting from the planned tax reinvestment. SG&A expense for the Family Dollar segment as a percentage of sales was 23.2% compared to 23.4% in the prior year's quarter. The 20 basis point improvement was a result of operating and corporate expenses decreasing approximately 40 basis points, resulting from lower advertising expense, legal fees and a gain on the sale of fixed assets. Depreciation and amortization expense decreased approximately 20 basis points as a result of certain assets that were revalued upon the 2015 acquisition becoming fully depreciated or amortized. Payroll expense increased approximately 35 basis points, primarily due to increased store hourly payroll as a result of the planned reinvestment of income tax savings and higher health care claims, partially offset by lower incentive compensation expenses. Operating income for the enterprise was $387.8 million compared with $425.2 million in the same period last year, and operating income margin was 7% compared to 8% in last year's third quarter. Operating margin -- income margin for Dollar Tree segment declined 20 basis points to 11.6% when compared to the prior year quarter. Operating income for Family Dollar segment was $55.9 million or 2.1% for the quarter. Nonoperating expenses for the quarter totaled $47.8 million, which is comprised primarily of net interest expense. Our effective tax rate for the quarter was 17.1% compared to 32.4% in the prior year period. The lower rate is a result of the Tax Cuts and Jobs Act, which lowered the federal tax rate to 21% from 35% the prior year. Additionally, the company recorded a tax benefit of $15.7 million based on the substantial completion of its analysis on the net deferred tax liability valuation. For the third quarter, the company had net income of $281.8 million or $1.18 per diluted share compared to the reported net income of $239.9 million or $1.01 per diluted share in the prior year's quarter. Looking at the balance sheet. Combined cash and cash equivalents at quarter-end totaled $708.3 million compared to $1.1 billion at the end of fiscal 2017. Our outstanding debt as of November 3, 2018, was approximately $5 billion. Inventory for the Dollar Tree segment at quarter-end increased 12% from the same time last year while selling square footage increased 4.7%. Inventory per selling square foot increased 6.9%. The increase reflects the acceleration of receipt of certain imported goods to minimize the impact of increased tariffs. We believe that current inventory levels are appropriate to support our sales initiatives for the fourth quarter. Inventory for the Family Dollar segment at quarter-end increased 7.1% from the same period last year and increased 5.4% on a selling square foot basis. The increased levels in the current year primarily represent our continued work to support in-stock levels and a modest increase in the average unit retail. Capital expenditures were $228.4 million in the third quarter versus $177.7 million in the third quarter last year. For fiscal 2018, we expect consolidated capital expenditures to be approximately $825 million. Depreciation and amortization totaled $150.5 million for the third quarter. Depreciation and amortization expense was $149.4 million in the third quarter last year. For fiscal 2018, we expect consolidated depreciation and amortization to be approximately $610 million. Our updated outlook for fiscal 2018 includes the following assumptions. Calendar considerations include the following. 2018 is a 52-week year, 2017 was a 53-week year and the 53rd week in Q4 of 2017 added $406.6 million to sales and approximately $0.21 to earnings per share. We reduced our sales outlook in Q4 due to opening 30 less Dollar Tree stores and 70 less Family Dollar stores than originally planned, as noted earlier by Gary. Our updated guidance now includes approximately $6 million for expected costs in Q4 related to our store support center consolidation. We expect continued pressure on store payroll, based on competitive markets and states increasing minimum wage. Additionally, as previously discussed, we continue to invest in store hours and average hourly wage rates as part of our $100 million investment into our business from our projected $250 million tax benefit. We expect higher domestic freight and diesel costs to continue. Net interest expense will be approximately $47 million in Q4. Our guidance does not include expenses and charges in connection with the effects of store optimization, including store renovations, store closures and other assets. We cannot predict future currency fluctuations. We have not adjusted our guidance for changes in currency rates. Our guidance assumes a tax rate of 21.75% for the fourth quarter and 20.2% for the -- for fiscal 2018. Weighted average diluted shares counts are assumed to be 239.3 million shares for Q4 and 238.9 million shares for the full year. For the fourth quarter, we are forecasting total sales to range from $6.10 billion to $6.21 billion and diluted earnings per share in the range of $1.86 to $1.95. These estimates are based on a low single-digit same-store sales increase and year-over-year square footage growth of 3.2%. For fiscal 2018, we're now forecasting total sales to range between $22.72 billion and $22.83 billion based on a low single-digit same-store sales increase and 3.2% square footage growth. Company now anticipates net income per diluted share for full year fiscal 2018 will range between $4.86 to $4.95 compared to the company's previously expected range of $4.85 to $5.05. I'll now turn the call back over to Gary.
Gary Philbin:
Thanks, Kevin. Following the completion of the acquisition of Family Dollar in July 2015, we've made significant progress on integration. We've exceeded our initial synergy targets, strengthened our balance sheet and, at the same time, laying the groundwork for our future growth.
As part of the integration process, we focused first on building a single infrastructure by implementing initiatives to establish a single foundation to drive performance across the organization and support the growth of both Dollar Tree and Family Dollar brands. As part of this foundational work, we successfully implemented a shared services model across corporate support functions. We introduced common systems and processes across both brands. We improved logistic and supply chain efficiencies, including testing and refining the approach in systems for combined distribution centers. Our first combined distribution center is in St. George, Utah, where we began servicing both brands in 2016. The learnings from this area are paving away for the launch of our next generation of combined DCs and additional synergies. And we commenced the consolidation of corporate functions, including all support functions into our Chesapeake, Virginia headquarters location. We expect to complete the consolidation by fall 2019.
With this foundation in place, Family Dollar's position, along with the Dollar Tree brand, should benefit from the combined scale of our broad footprint. But our integration work has not only been focused at the corporate level. During this time, we've implemented initiatives to improve operational performance across the footprint of Family Dollar stores. Examples of our work:
building the leadership team by hiring executives with significant and relevant retail experience; changing restock policies to improve in-stocks; improving adjacencies and merchandising of key impact categories that are focused on consumables and increased refrigeration; introducing programs and training to enhance the sales culture, including, at store level, compensation programs to better incentivize and align performance; launching Smart Ways to Save, our customer-facing marketing program; investing in mobile technology and introducing Smart Coupons to better reach core customers and increase store loyalty; commencing a program to improve and rebrand private label products and increase the variety and quantity of private label products in-store; completing a store format test to optimize layout and develop a new prototype design.
As we discussed in prior calls, we have analytically looked at our process to optimize Family Dollar real estate portfolio through renovating stores, rebannering stores to Dollar Tree brand or closing stores. Since completing the Family Dollar transaction, we have opened 830 new Family Dollar stores, renovated 865 Family Dollars, rebannered 354 stores from Family Dollar to Dollar Tree and closed 195 Family Dollar stores. Our renovation program really began 18 months ago, and since then, we've continued to take the learnings from each generation of renovations and applied them to the next. You've heard us say our renovations are comping to mid- to high single digits. That's true when you look at the entire footprint of renovated Family Dollars. However, if you look at the more recent renovations, we're seeing higher comps, which gives us the confidence we're executing well. We're, therefore, going to begin accelerating our store-optimization program in 2019. As of now, we expect to renovate a minimum of 1,000 Family Dollar stores in fiscal 2019. Next year, we plan to open 350 new Dollar Tree stores and 200 new Family Dollar stores as well as rebanner additional 200 Family Dollar stores to Dollar Tree. Additionally, in '19, we'll be expanding Snack Zones to additional Dollar Tree stores. And we expect to be in a position to provide you with additional information on these store-related projects in 2019. So in summary, through the hard work we've done in the past 3.5 years, we put in place the foundational elements that we need to be successful over the long term. And with the acceleration of our program to optimize our fleet of stores under the Family Dollar brand, we're going to improve the customer experience across our portfolio and accelerate our growth. We've done a lot of testing, and we know what works in both urban and rural markets. And based on that, we think we have a tremendous opportunity ahead of us and across the country. In short, we're more excited about our future than ever. Let me give a brief update on our capital allocation plans. In connection with the acquisition, we did not make share repurchases in order to allocate sufficient capital to reduce outstanding debt, invest to support the growth of Dollar Tree and Family Dollar and invest in the initiatives to integrate Family Dollar and to improve store performance across the portfolio. Since completing the acquisition, we've paid down approximately $3.5 billion in debt. In March, we achieved upgrades to investment grade from S&P Global and Moody's, and we have continued to produce strong cash flow from operations. As a result of our successful progress with integration and free cash flow in excess of investment needs, we expect to pay down our variable rate outstanding debt. The company has an existing $1 billion board authorization to repurchase shares and will continue to evaluate share repurchases in 2019. We plan to provide more information related to our capital allocation strategy in 2019. In summary, we continue to focus and make meaningful progress to grow and improve our business for both brands. We are well positioned in the most attractive sector of retail to deliver continued growth and increase value for our long-term shareholders. The combination of more than 15,000 Dollar Tree and Family Dollar stores provide us the opportunity to serve more customers in all types of markets. This combination of 2 great brands provides great flexibility in managing our future growth. Before I turn the call over to Q&A, I'd just like to make a shout-out to our store and field teams both after the hurricanes and recent fires. Many of our store associates and customers were personally affected by these storms. I want to personally and publicly share our thanks to the thousands of associates that worked tirelessly to have their stores open and serve their customers in preparation for and then in recovery from these significant weather and fire events. We saw great teamwork, passion and dedication throughout the organization. My personal thanks for all the efforts made in our stores, our Marianna distribution center, support centers and our many vendor partners that enabled us to get the impacted stores back up and running in hours and days through and after these events. Operator, we're now ready to take questions.
Operator:
[Operator Instructions] The first question will come from Michael Lasser with UBS.
Michael Lasser:
Gary, can you provide more context around your comment that you mitigated 80% of the 25 -- 80% at Dollar Tree and 50% at Family Dollar of the 25% potential tariff? Does that mean that if the tariff goes through, you will see a 20% hit at Dollar Tree and a 50% hit from that at those 2 banners? Or is there more to go? And as part of that, how have you been able to mitigate it such that -- could there be an effect to your customer from either lowering product quality, product size or other factors?
Gary Philbin:
Michael, thank you. Yes. And really, it's -- I called out the efforts of both merchandising teams. We're anticipating -- I mean, we should -- it doesn't, but we're anticipating it's going to go to 25%. So the number I'm referencing is -- we expect the 25%. So the mitigation is based on that going through. And you've heard us mention how we've done it before. I mean, it sounds like it's easy. It's not because we're touching a lot of SKUs. The one thing you mentioned, though, is lower quality. It's -- we don't reduce quality. It could be a count size change, but I would say it's probably been a bigger effort around where else can we buy things besides China, compare it to landed costs, a subtle thing, how do we make things to have better cube to come across so that we can land it on the U.S. side at a better landed cost. It's negotiation with our vendors who also know this is a very important time with the kind of volumes and [indiscernible] some of the factories to negotiate that. So it's never one thing. It's our efforts to negotiate very well on both sides, take a look at the items. What do we have to have? What don't we have to have? What can we change? What would you modify in how you pack it? But we're going to go into this -- but this will be a year where we also have to be nimble. Because while other folks get to raise retails, including our Family Dollar banner, as I've told folks before, our customers often don't have that extra dollar. So we've got to be just better buyers, and it's going to speak to both how we buy, the specs we buy to and which countries we go to.
Michael Lasser:
And just to clarify, is there room to further mitigate the 20% at Dollar Tree and 50% at Family Dollar? I mean, just a follow-up. I think there's a prevailing view in the marketplace that even with the -- with the available [ dote today ], that Dollar Tree -- the enterprise's operating margin is going to continue to be under pressure for next year and down. I recognize it's early. But what would be the offset to all these factors that would allow you to keep your operating margin either flat or growing?
Gary Philbin:
Well, to the first part, on the imports, well, we're still working hard. Listen, this -- we started in earnest in August, September, and we've made one trip. We still got things to buy in the back half of the year. That's really the balance of what we have to mitigate. So we're off to, I think, a real good start at both banners, more work to be done. And the pressure that comes, we -- this is going to be a year where we're going to have to understand what the customer -- between the tariffs, we've gone through a year of really nothing in my retail history on seeing the lack of truck drivers that impacted freight. But I want to go into next year thinking that we have the right assortment in place for our customers first and drive business. And from there, we get the chance to leverage some of our fixed costs and other things that we've always done to drive up income. But as I look into 2019, this is going to be all about let's stay real close to our customer and what do we buy that they respond to in both banners.
Operator:
Next question will come from John Heinbockel with Guggenheim Securities.
John Heinbockel:
So let me start with what's your broader thought on the Family Dollar store footprint, including the possible need for underperforming store closures? And then kind of tied to that, when you think about the 1,000 remodels next year, plus the openings, your thoughts on the field organization's ability to handle all of that change in 1 year's time.
Gary Philbin:
Well, agreed. I mean, I think we boldly stepped out there and said, we're going to do -- really, across both banners, but I'll stay focused on Family Dollar, a lot of renovations, more than we've done. And the reason we like that and it's important is what we're seeing in the current renovation. So I would tell you the field's excited, everything we've done, John, to get our folks incented and aligned to run better stores. Now here's a chance to change the 4 walls of their stores. Now we've got to do one store at a time, maybe opportunity to drive more footsteps into these stores and improve top line. I would tell you, they're raising their hand, "Give me one of those." The execution piece, we've got to be on top of our game. It's a lot because of what you do to enhance the store and reset it and the SKUs that come in and out. So it's not a small task for the field team to execute, but we're up for it. This is our opportunity to make meaningful change at Family Dollar. It's how we've described it to our organization. They've seen the ones that are responding. I walked a recent store with both our RD and DM recently. Their eyes light up. The consistency, execution, we're going to be all over that next year. And I want to go through 2019 saying we did at least 1,000 of them, and we were pleased with all of them. And that's going to be the bar that we set going to 2019. Along with that is the rebanner. So just to call out, as we've taken a look at the store in reference to the broader question, we've taken a look at which stores are responding to the renovations and what is in urban versus rural. And the stores that are tweeners, you might say, well, that's where we're harvesting some of those to become Dollar Trees, so the opportunity to now understand that in a better way as we continue our iterations of renovations. And the stores that don't respond to that, now we can sort of see that. The things that we have worked on, on table stakes to get all stores to improve, those are good things to work on in retail. I think what we like about the renovations is that's what changes, really, the course of the future footsteps for that store and sort of breaks out for us. So that's our effort for 2019.
John Heinbockel:
And then just secondly on the tariff topic. Is the mitigation at Family Dollar, the 50% versus 80% spread, is that more a function of FDO does have pricing flexibility, right, where Dollar Tree doesn't? And if we do not get the 25% -- we will assume we do -- but if we did not get it, does that, on the incremental 15, I assume your gut feel would be to reinvest that benefit into the business, not keep it.
Gary Philbin:
Well, listen, other people raise retails up or raise or lower them. And for us, you have to be close enough to this customer and have the same kind of value. The magic at Dollar Tree only works if they know that's worth more than $1 because it is somewhere in their shopping universe. Now Family Dollar, we don't have -- we always got flexibility. At Dollar Tree, our promise is to have great value in the store, not necessarily that item. At Family Dollar, there are some basics that I want to make sure we're in place with. Our team's still working hard on. We have our big post holiday trip. We will do better than where we are today. But at the end of it, we may have to invest some of that to stay in place with the right items as we go into 2019. I don't think you can just say, "Listen, if the tariff goes to 25%, it's a real thing." Other retailers are going to be faced with that, too, and we're going to respond to it, in our world, the right way to make sure our customers see the right values in both Family Dollar and Dollar Tree.
Operator:
The next question will come from Peter Keith with Piper Jaffray.
Peter Keith:
Wanted to just dig a little bit more into the renovation initiative around Family Dollar. So Gary, last quarter, you had said that you were getting a mid-single-digit comp lift. This quarter, you said the store is performing better. Could you give us a sense on what some of the changes were that have driven that better performance so we can hope to see that continue into 2019?
Gary Philbin:
Exactly. I mean, I would say it's not going to be one change. But I would just say this, Peter, as we went through, really, over the last 18 months, you put these stores out there, you see what responds. It's easy to walk in a store. You like the layout, always comes down to the look and feel. But I would tell you, it's more around the assortment that the customer ultimately sees. So our latest iterations have focused on some of the things the customer needs most. I mean, you've heard us talk about consumables, very important for Family Dollar. It's a piece of the emphasis. I think the adjacencies that we've been talking about are paying off for us. Some of the price impact that we're making throughout the store is a piece of it. I think we'd just tell you what we've done that gives -- finds us a way to get that last dollar when she's waiting for our checkout is as important as anything we've done in the store. So is it one thing? No. Is it the combination of all those efforts that got us to that? Yes. And to me, Peter, the final judge for me -- and listen, we'll continue to refine. I mean, I can't put a thermometer on this and tell you we're all the way to the boiling point where we like it, but I think we're pretty darn close. And I would just tell you that it shows up in footsteps into the front door.
Peter Keith:
Okay. I did also want to dig into the opportunity for combined supply chain. And you've had the St. George, Utah test. It's going on for 2 years. So certainly can appreciate it's a complicated initiative, but also surprised that it's been a 2-year test. Could you give us a sense on what's taking so long at this point? And as you're looking forward, when can we begin to expect to see this broaden out to more of the DC network?
Gary Philbin:
Well, it is complicated. Thank you for recognizing that. And it's -- we're past the test stage. I mean, we've built our latest DC in Warrensburg, Missouri now with the same systems that St. George allowed us to ship both banners. The difference and the issue really has been as we rebannered stores from Family Dollar to Dollar Tree, as stores were divested then rebannered from Family Dollar, all the capacity needs over the last 3 years have been on the Dollar Tree side. And so while Warrensburg has the capacity, at this point, we need the capacity for Dollar Tree, at some point, Family Dollar will show up there. And so I think where you're going to see it is the new DCs will get to that ability to ship first. And then while you have -- as we shift volume to and from in the network, then we'll have a better opportunity to go back into some of the locations probably on the Family Dollar DC side where they have capacity to shift to Dollar Tree stores. We don't -- we're working on that. I don't have a timeline to tell the Street that, that's when it's going to happen. It's still ahead of us, but we are planning for it.
Operator:
The next question will come from Dan Wewer with Raymond James.
Daniel Wewer:
Kevin, I wanted to ask you about the cost of the renovations and also the time to complete a renovation. And just to confirm, is the sales lift now exceeding that mid-single-digit rate that you had alluded to in the past?
Kevin Wampler:
Yes, Dan. I think from a cost perspective, what we had said is it really ranges from probably $100,000 to $150,000, and the big variable is always going to be the number or amount of refrigerated and cooler units and freezer units that we may be putting into that store. So that's the biggest variable. And the typical renovation, it takes us only about 2 weeks. So it's a very coordinated effort, as you can imagine, to -- because there's some pretty significant changes in regards to moving layout, changing the storefront and as well as adding immediate consumption coolers to the front of the store. So it's well coordinated. I think we feel pretty good about the work we've done to get that down to a pretty nimble timeline. And then in regards to your question, the mid-single-digit comps, and obviously, Gary has commented it's higher. We haven't really specifically said how much higher, but it is definitely higher than the mid-single-digits.
Daniel Wewer:
During the 2 weeks to complete the renovation, and we have 1,000 of these taking place next year, could this put additional pressure on your inventory shrink accrual?
Kevin Wampler:
Well, I mean, I think part of this is, again, you do really have to look at inventory in these stores. And some categories might get a little smaller, so there can be some inventory movement. But I would tell you, just in general, we are not satisfied with where our shrink has been this year in either banner. It has not been a result that we're very proud of. It's something that we are working on, and again, it's just not something that you usually see out of us from an execution standpoint. So it's on the top of everybody's list out there, in the operations, loss prevention and the whole organization, from the standpoint of understanding that this is just as important as driving sales out there. So I don't want to say it's going to put pressure on it because my expectation is we have to do better next year.
Daniel Wewer:
Yes. And then just as a quick follow-up question. If you had unlimited resources, both people and capital, how many Family Dollar renovations would you like to ultimately complete?
Gary Philbin:
There'll be thousands. I mean...
Daniel Wewer:
Starts with a 2?
Gary Philbin:
Wait. I'd tell you -- I mean, it's -- Dan, it's really an issue of -- a thousand's a big number. We're -- and I'm -- I said a minimum because I'm obviously hoping for more because that's how I'm thinking about it. But I think, seriously, from the standpoint of just is this a 1 year project? No. We will see the results of this larger group of stores helping us, certainly, as we get into '19 and more and more of them are behind us. But I would see us doing a similar number in '20.
Operator:
The next question will come from Chuck Grom with Gordon Haskett.
Charles Grom:
Just beyond the remodels, Gary, when you think about investments that need to be made, whether it be labor, training, technology, what else do you think needs to get done to rightsize the banner? And how do you think about the operating margin profile of the Family Dollar segment over the next couple of years with that in mind?
Gary Philbin:
Well, it's one of the reasons we're doing the renovations, Chuck, is -- listen, as the stores go up in volume, they leverage their 4-wall fixed expenses. But I think you touched on the investments that are needed. I mean, we've talked about -- and I tried to call out some of the big ones that we've done. Technology will continue to migrate to best-in-breed between the 2 banners on some of the systems that we need. We'll continue to invest in our people, especially with unemployment being at a near all-time lows, just what we've done this year on what we call the year of the store manager, to drive success store by store with improving our store manager prioritization, how they direct, how they follow up with people. I mean, this is not either/or. We've got to do both. Over time, operating income, listen, we still have our sights set on where we started this journey. We will continue to improve it. I think what I want to emphasize today is we need to touch a meaningful amount of stores to get the consistency towards that trajectory that gets us there. And I've called out before the things that we've been doing, the blocking and tackling on our table stakes. All good retailers have to do that. But the equation that I want to change is to drive more renovations. And listen, we'll do the rebanners, too, because right off the bat, if it's the right market and the right neighborhood, adding a Dollar Tree assortment certainly changes the 4-wall cash immediately on that store, whether sales go up or not. But what we've seen is customers do figure out eventually that is a Dollar Tree, and we see multiyear comps coming from the rebanner segments that we've done. So when we find the right store to do that, we do that, too. So between those 2, you go out a few years, you start getting better comps from the suite of renovated stores that start to leverage their fixed expenses. You start to see rebanners that are opportunistic coming out of the Family Dollar fleet and falling into the Dollar Tree 4-wall cash model, and I think that's how we take a look over the next few years on building the business plan.
Charles Grom:
Okay, that's very helpful. And then my follow-up question would be just on comps variability across the Family Dollar banner. I'm just wondering how wide is the performance across your stores. And is there a thought to close more stores in the coming years on some of the stores that, I guess, are potentially underperforming the chain?
Gary Philbin:
I think that's the work we've really been doing on the store optimization, on taking a look at -- okay, to your point, we got stores that are -- we got good stores. We got great stores at Family Dollar. You got some that aren't where you want. So how do you fix them? Well, as we've done the renovations, well, now with the newly -- assortment and everything we just talked about, well, there's an answer. Some don't seem to respond the same way, well, maybe those should be rebanners. Some are just operational improvement. We need to get, as always, the right team, the right effort from our operations. And then those that can't respond, they might be too old, might be too small. We're dealing with a big and older fleet of stores. At some point, you got to say when do you close them, at lease end or being opportunistic.
Operator:
[Operator Instructions] The next question will come from Matthew Boss with JPMorgan.
Matthew Boss:
On the margin front, how are you thinking about freight and markdowns at both banners in the fourth quarter? And larger picture, as we look to next year, do you see the opportunity to drive positive consolidated operating margin as you put together all the headwinds and tailwinds that you see today on the horizon?
Kevin Wampler:
Yes, Matt. As we speak to freight, I think we look at that as a continued headwind as we look at the fourth quarter. And again, diesel, while it's still up, I believe, in Q3, it was up roughly about 20% as a rate year-over-year with the recent pullback in oil prices that may dissipate a little bit in Q4. So that may come down a little bit. But freight in general, I think as the driver shortage and -- that's out there and the pressure we're seeing from that, we expect freight to continue to be up. And even really potentially through the first half of next year, there could be some pressure as well. But again, that's ongoing. From a markdown perspective, it's really pretty much a nonevent in the green banner because there just aren't that many markdowns. The Family Dollar business is obviously a little different from a markdown perspective. As we've noted in Q3, markdowns were up, partially to drive sales and, again, partially just to make sure we're moving through inventory appropriately. As we look at Q4, I would tell you, I would expect markdowns in the Family Dollar business to be up year-over-year. Again, I think the opportunity to be aggressive when appropriate and to keep our inventory as clean as we can is important. So I think that's there for us. And I think as we continue to push that business forward, that's something we need to continue to look at. In regards to 2019, obviously, we haven't given any guidance at this point, and we're finishing up, really, the planning and the budgeting as it relates to 2019. So there's not really much I can say at this point in time. But I would tell you it's always our expectation that we move the business forward and improve the business, and that's what's going to be our guiding principle as we go into 2019.
Operator:
The next question will come from Greg Melich with MoffettNathanson.
Gregory Melich:
I love just to follow up on tariffs a little bit. Thanks for explaining how we're really working to mitigate it. Remind me, how much of your COGS, if you disclosed it or not already, are on the current list? I think we had around 25% of COGS coming from China, but I don't think that was the current list.
Gary Philbin:
The current tariff list, I think we've declared that we have about 9% of our sales are coming through that are tariff at this point from the tariff [indiscernible].
Gregory Melich:
Got it. And so if that extended, that might be different, but that is -- what you're referencing was mitigating 50% or 80% of what's currently on the list.
Gary Philbin:
I say the tariff 301 list is what we're [ referencing ].
Gregory Melich:
Perfect. Got it. And then a follow-up from before. You mentioned getting the $100 million reinvestment of the $250 million tax savings. How should we think about that in terms of -- is there any left? Or do we repeat part of that investment next year? Remind me of the timing of that. Was that all of an investment this year? Or was some of that $250 million going to be in the following years?
Kevin Wampler:
The $250 million, that's the 2018 benefit with us reinvesting $100 million into labor and -- both in rate and hours. That's not only stores but also within our DC environment as well. So that will continue through Q4. I think as we look into 2019, my very early read would tell you that there's likely to still be some general pressure on wages just from competitive marketplaces as well as some states continuing to increase their state-mandated minimum wages. But I think the $100 million really was related only to 2018.
Operator:
The final question will come from Robbie Ohmes with Bank of America.
Marisa Sullivan:
This is Marisa Sullivan on for Robbie Ohmes. I just wanted to see if you could comment a little bit on traffic trends at the Family Dollar banner and how they've trended in the third quarter then quarter-to-date and whether we should be expecting a positive comp inflection at Family Dollar in the fourth quarter and what would be the drivers?
Gary Philbin:
Well, we'll go against a, I believe, one comp last fourth quarter. Here we are starting off the holiday season in earnest. To me, the kickoff is a little bit of Thanksgiving, but probably more for our customers, the first week of December. So all of our plans, all of our efforts, the alignment of getting the merchandise to the right stores, that's going to be the proof in the pudding over the next few weeks. So you certainly -- we call it, it's a big spike in our business as we march towards December 25. So listen, we're going to work hard on -- we're excited about the holiday season. I think we got our folks in the right place. We spent a lot of time in both of our field meetings way back in August to get them prepped on the excitement of the items that we have in our stores. We've gotten into not just stores but on display. I think both banners really going to this year have really done a job to improve the holiday assortment. And right now, we're sort of in the, you might say, trim a home and trim a tree segments. Trim a gift and gift-giving is still ahead of us. So those are clearly the biggest categories. For Family Dollar, it will be, I think, opportunity for us to really [ shout ] down toys with the void in the markets. We did lean into the toy business this year, and I think it's going to be an important part of us having a positive comp as we go through December.
Operator:
Thank you for the question. I'll now turn the conference back over to Mr. Randy Guiler for closing remarks.
Randy Guiler:
Thank you, Brandon, and thank you for joining us on today's call and especially for your continued interest in Dollar Tree and Family Dollar. Our next quarterly earnings conference call is to discuss fourth quarter and fiscal 2018 results. That call is tentatively scheduled for Wednesday, March 6, 2019.
Thank you, and have a good day.
Operator:
Thank you, ladies and gentlemen. That concludes today's event. You may now disconnect your lines.
Operator:
Good day, everyone, and welcome to Dollar Tree, Inc.'s Second Quarter Earnings Call. Today's call 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.
Randy Guiler:
Thank you, Lisa. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the second fiscal quarter of 2018. Participating on today's call will be our President and CEO, Gary Philbin; and our CFO, Kevin Wampler.
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 Annual Report, 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. [Operator Instructions] Now I will turn the call over to Gary Philbin, Dollar Tree's President and Chief Executive Officer.
Gary Philbin:
Thank you, Randy, and good morning, everyone.
This morning, we announced our results for our second quarter. Sales increased 4.6% to $5.53 billion. Our consolidated same-store sales increased 1.8%. By segment, our comp sales for Dollar Tree banner increased 3.7%, and the Family Dollar banner's comps were flat compared to last year's Q2 increase of 1%. Our enterprise gross margin rate declined 70 basis points to 30.1%. Operating income was $382.5 million or 6.9%. And diluted earnings per share increased 17.3% to $1.15, $0.01 below the high end of our guidance range. In mid-July, our company hit a milestone by opening our 15,000th store. We celebrated the occasion with exciting offers and promotions at both Dollar Tree and Family Dollar stores, along with coordinated grand opening celebrations at select stores across the country. Also in July, we opened up our 23rd U.S. distribution center located in Warrensburg, Missouri, on time and on budget. The 1 million square-foot facility is creating approximately 400 jobs in Western Missouri and will initially be serving Dollar Tree stores but is equipped with the necessary systems to serve both Dollar Tree and Family Dollar banners in the future. The partnership and support we received from the state of Missouri, the city of Warrensburg and the surrounding communities was just outstanding. The Dollar Tree sales initiatives have been hitting on all cylinders. Dollar Tree has now delivered 42 consecutive quarters of same-store sales growth. In fact, each of the last 5 quarters, the increases have been greater than 3.5%. The last time Dollar Tree hit a streak of at least 5 consecutive quarters over 3.5% was in 2012. Our merchandise excitement continues to be driven by great values for $1, the discovery of what's new and our efforts around our major holidays and seasons. Dollar Tree continues to grow its business around these important times of the year. For our Dollar Tree banner in the second quarter, top-performing categories were snacks and beverage, candy, health and personal care, toys and household consumables. Sales performance was balanced across discretionary and consumables. Comps were positive all 3 months. May's same-store sales was the strongest month in the quarter. However, on a 2-year stack basis, July had the best monthly performance, as we had a very strong July in 2017. Geographically, Dollar Tree's same-store sales growth was strongest in the West, Southwest and Midwest, and all of our zones delivered positive comps greater than 2.5%.
For the Family Dollar banner, in the second quarter, while we did not achieve our intended target on comps for the quarter, we continue to focus on the key initiatives that will drive to long-term success. The important elements that will change the sales trajectory for Family Dollar are:
Investment in the customer experience, including better in-stocks and assortment; more private brand offerings, along with better buying from our import capabilities; delivering value through our Smart Ways to Save, specific customer offers that are targeted through our Smart Coupon program; and most of all, around our efforts to renovate the stores with better adjacencies and merchandise impact of our important categories.
Top-performing categories in the quarter included Beauty Care, accessories, electronics and snacks and beverage. Our comp performance in the quarter was driven by consumables. Approximately 3/4 of our business at Family Dollar is consumable needs-based products. And we've comped again positively for 7 consecutive quarters. For cadence in the quarter, comp sales were strongest in May. And July was negative, but up against the toughest comparison in the prior year. Geographically, Family Dollar same-store sales for the quarter was once again strongest in our Northeast and West zones. Switching to Canada, highlights for Dollar Tree Canada. Our team continued to deliver mid-single-digit positive comps for the quarter, with increases in both traffic and ticket. The sales growth was balanced as both discretionary and consumables comped better than 5% for the quarter. Top-performing categories in Canada included books, lawn and garden, candy and greeting cards. For Dollar Tree Direct, while small, less than 1% of our sales, will continue to be an important part of our business. It provides us the tool to connect with our customers, enhance loyalty at Dollar Tree and drive brand awareness. In Q2, we saw double-digit increases in both sales and website traffic to DollarTree.com. Our efforts here to connect with our customer and organizations help them find easily the solutions they need for bulk purchases and the ability to buy first some of the early season's great values. We continue to engage our customers in all forms of social media, with a growing base of fans and social interaction that includes creative videos highlighting the Dollar Tree product. Please check both our websites, DollarTree.com and familydollar.com.
Now looking at real estate in the second quarter. We opened a total of 146 new stores:
82 Dollar Trees, 64 Family Dollars. We've relocated or expanded 13 stores
Before I turn the call over to Kevin, I just want to speak briefly about tariffs and the potential for additional tariffs that are in the news. So far, the United States Trade Representative has implemented tariffs against $50 billion in Chinese goods and is considering implementing 10% or 25% tariffs against an additional $200 billion in Chinese goods. This potential impact could be mitigated by a variety of factors. The USTR may reduce a list of impacted tariff lines before tariffs are implemented, and later, may even grant specific product exclusions. We are and will be active in the process. We will not stand still. Like other shocks to the system, we will do what we have always done to mitigate impact. We can also attempt to negotiate price concessions, change product sizes, specifications and evolve product mix. At Family Dollar, we can do all those things, and we can also change our price. And as always, we've always taken a look at alternative sources of supplying product outside of China. I'll now turn the call over to Kevin to provide more detail on our second quarter performance and our outlook for Q3 and fiscal 2018. Kevin?
Kevin Wampler:
Thanks, Gary, and good morning. Total sales for the second quarter grew 4.6% to $5.53 billion, within our guidance range of $5.47 billion to $5.57 billion. Dollar Tree segment total sales increased 7% to $2.77 billion, and Family Dollar segment total sales increased 2.3% to $2.76 billion. Enterprise same-store sales increased 1.8% on a constant currency basis or 1.9% when adjusted for Canadian currency fluctuations. On a segment basis, same-store sales for the Dollar Tree banner increased 3.7% or 3.8% when adjusted for Canadian currency fluctuations, and the Family Dollar banner comp was flat compared to the prior year's quarter.
Overall, gross profit increased 2.2% to $1.66 billion for the second quarter of 2018 compared to the prior year's quarter. As a percent of sales, gross profit margin declined 70 basis points to 30.1% versus 30.8% in the prior year's quarter. Gross profit margin for the Dollar Tree segment was 34.5% for the second quarter, a 10 basis point decline compared with the prior year's second quarter. The decline was primarily due to 20 basis points of increased shrink cost, partially offset by improved merchandise cost, net of freight, as sales mix positively impacted margin, offsetting freight headwinds. Gross profit margin for the Family Dollar segment was 25.7% during the second quarter compared with 27.2% in the comparable prior year period. The 150 basis point decline was primarily due to merchandise costs, including freight, which increased 85 basis points, resulting from higher domestic freight costs, partially offset by increased initial mark on. Distribution costs increased 30 basis points due to higher merchandising and distribution center payroll-related costs. Shrink cost increased 15 basis points, and occupancy cost increased 10 basis points, resulting from the deleveraging effect of flat comparable store sales. Consolidated selling, general and administrative expenses as a percentage of net sales in the quarter increased 30 basis points to 23.2% from 22.9% in the same quarter last year. Excluding the $2.6 million receivable impairment from the prior year's quarter, SG&A as a percent of sales increased 40 basis points from an adjusted 22.8% in the prior year's quarter. The increase was driven by higher store payroll costs, partially offset by lower depreciation and lower store repairs and maintenance cost as a percentage of sales. Second quarter SG&A expense for the Dollar Tree segment as a percentage of sales increased to 23.7% compared to 23.4% in the prior year's quarter. The increase was primarily due to our store hourly payroll cost, which increased 40 basis points related to our planned Tax Cut and Jobs Act savings reinvestment plan. SG&A expense for the Family Dollar segment as a percentage of sales was 22.6% compared to 22.4% in the prior year's quarter. Excluding the $2.6 million receivable impairment from the prior year, Family Dollar SG&A as a percentage of sales increased 30 basis points from 22.3%. The increase was a result of a 55 basis point increase in store hourly payroll expense that was partially offset by lower repairs and maintenance cost and lower depreciation expense. Operating income for the enterprise was $382.5 million compared with $419.5 million in the same period last year, and operating income margin was 6.9% compared to 7.9% in last year's second quarter. Operating income margin for the Dollar Tree segment declined 40 basis points to 10.8% when compared to the prior quarter (sic) [ prior year quarter ]. Operating income for the Family Dollar segment was $84.8 million or 3.1% for the quarter. Nonoperating expenses for the quarter totaled $44.8 million, which was comprised primarily of net interest expense. Our effective tax rate for the quarter was 18.9% compared to 32% in the prior year period. The lower rate is the result of the Tax Cuts and Job Act, which lowered the federal tax rate to 21% from 35% in the prior year as well as an $8.1 million reduction in the reserve for uncertain tax position resulting from statute expirations. For the second quarter, the company had net income of $273.9 million or $1.15 per diluted share compared to reported net income of $233.8 million or $0.98 per diluted share in the prior year's quarter. And looking at the balance sheet. Combined cash and cash equivalents at quarter end totaled $647.3 million compared to $1.1 billion at the end of fiscal 2017. Our outstanding debt as of August 4, 2018, was approximately $5 billion. Inventory for the Dollar Tree segment at quarter end increased 8.5% from the same time last year while selling square footage increased 4.6%. Inventory per selling square foot increased 3.6%. We believe that current inventory levels are appropriate to support the scheduled new store openings and our sales initiatives for the third quarter. Inventory for the Family Dollar segment at quarter end increased 15.6% from the same period last year and increased 12.9% on a selling square foot basis. At quarter end last year, inventory was down 5.2% in total and 6.3% on a selling square foot basis. The increased levels in the current year represent our continued work to support in-stock levels as well as early receipts of certain holiday merchandise. Capital expenditures were $213.4 million in the second quarter versus $161.4 million in the second quarter last year. For fiscal 2018, we are planning for consolidated capital expenditures to range from $850 million to $865 million, a slight decrease from our prior 2018 outlook. Depreciation and amortization totaled $152.6 million for the second quarter. Depreciation and amortization expense was $151.4 million in the second quarter last year. For fiscal 2018, we continue to expect consolidated depreciation and amortization to range from $610 million to $620 million.
Our updated outlook for fiscal 2018 includes the following assumptions. Calendar considerations for the year include the following:
2018 is a 52-week year. The 53rd week in Q4 of 2017 added $406.6 million to sales and approximately $0.21 to earnings per share. Halloween shifts from Q4 into Q3. This shift favorably impacts Q3 from a revenue and earnings perspective and has no impact to same-store sales.
We expect continued pressure on store payroll based on states increasing minimum weights -- wages. Additionally, as previously discussed, we continue to invest in store hours and average hourly rates as part of our $100 million investment into the business from our projected $250 million tax benefit. We expect higher domestic freight and diesel cost to continue. These costs continued to trend higher than our original guidance, and we have reflected this in our outlook. We continue to work to mitigate these increases as we go forward. The company, along with other retailers, recently learned of an antidumping duty assessed by the U.S. Department of Commerce on certain Chinese ribbon products. We expect to incur $0.04 per share of expense in our fourth quarter to account for the antidumping duty assessment. The interest expense will be approximately $47 million per quarter in Q3 and Q4. Our guidance does not include any share repurchases. And we cannot predict future currency fluctuations, so we have not adjusted our guidance for changes in currency rates. Our guidance assumes a tax rate of 21.5% for the third quarter and 21.4% for fiscal 2018. Weighted average diluted shares counts are assumed to be 238.9 million shares for Q3 and the full year. For the third quarter, we are forecasting total sales to range from $5.53 billion to $5.64 billion and diluted earnings per share in the range of $1.11 to $1.18. These estimates are based on a low single-digit same-store sales increase and year-over-year square footage growth of 3.4%. For fiscal 2018, we are now forecasting total sales to range between $22.75 billion and $22.97 billion based on a slow -- a low single-digit same-store sales increase and 3.4% square footage growth. The company now anticipates net income per diluted share for the full fiscal year 2018 will range between $4.85 and $5.05 and includes the previously mentioned $0.04 per share of antidumping duties compared to the company's previously expected range of $4.80 to $5.10. Now I'll turn the call back over to Gary.
Gary Philbin:
Thank you, Kevin.
Over the past few weeks, I attended our annual field leadership meetings at both Family Dollar and Dollar Tree. It's our opportunity to connect with our field leaders face-to-face, teach and learn, recognize and reward individuals and the teams for superior performance and give service awards. We interact with our merchant leaders on sales-driving initiatives, coach field leaders on people development and ensure that we're all aligned heading into the important holiday season. We had very productive meetings, and I'm pleased with the caliber of businessmen and women that are leading our field organizations. Our leaders are energetic, focused and motivated going into this important back half. For Dollar Tree, the banner is up against some great sales at the back half of last year, a 5% comp in Q3 and a 3.8% in Q4, but let me talk a little bit about the sales-driving initiatives in place to successfully cycle these numbers. These include our Snack Zone. Last quarter, we provided initial details regarding this concept, which we had been testing in Dollar Tree stores for some time. By the end of Q2, we have had Snack Zone up and running in more than 500 stores. Store and customer feedback has been terrific, and the numbers support this. And we really like the lift we're getting in this new category within the store. The concept targets on-the-go customers with immediate consumption items. Snack Zone sales are consistently outperforming the sales lift targeted for them. And mid-single-digit percent of the store sales are coming from the Snack Zone items. We plan to have the Snack Zone in at least 750 stores by the end of fiscal 2018. We're already in the development stage of Snack Zone 2.0, which can be rolled out to smaller-footprint Dollar Tree stores in 2019 and beyond. Also, this week, we are announcing a new, exciting partnership that Dollar Tree has with the Hallmark company with our greeting cards. Over the past 3 months, we have rolled out Hallmark greeting cards to all of our Dollar Tree stores. The new greeting cards are Expressions From Hallmark priced at $1, and the heartline line of cards from Hallmark priced at $1 for 2 cards. All the cards are brand new and designed exclusively for Dollar Tree. These cards are tailored to be relevant to our customer base in our surrounding stores and celebrate every type of occasion. I could not be more proud of how Hallmark, our merchant teams and store teams executed this transition flawlessly across 6,000-plus stores. It brings a world-class brand into Dollar Tree. We're excited about this new partnership. And I encourage you to see our Hallmark cards being promoted on our website, in stores and social media now that it's in every Dollar Tree store.
Additionally, our merchant teams continue to locate and source terrific buys that bring the thrill of the hunt to the consumer. Visit our stores now and you'll see that we are stocked and ready for business. We're winding down the summer and back-to-school offerings and already showing the new holidays ahead of us:
Halloween, fall, harvest. We are entering the best time of the year for Dollar Tree to show what's new for the season.
At Family Dollar, we left our field leadership meeting with an emphasis on our store execution and consistency of delivering a Family Dollar brand standard. Our combined efforts to focus on driving a better store experience, along with the tools our store managers and district leaders need to win, was the focus of our year-long efforts to drive better store-level traffic and conversion in store. The merchandising energy looked great, and our teams are up for the challenge in the back half. Our field leadership is focused on the elements that will win in the marketplace. Our investment in our people, our labor to drive sales, understanding sales impact and merchandising energy within their 4 walls, shrink control and store growth and renovations.
I've talked about our initiatives around Family Dollar. The basics we are correctly focused on:
A better customer experience; better in-stocks and store conditions; improved private brands, along with the value compared to our national brand counterparts; import merchandise, it allows us to create value, but also to bring the excitement to our store categories; focus on the value and convenience, our call-out for Smart Ways to Save.
We've seen our customer respond around consumables as we've had 7 consecutive positive comps in this important line of our business. Dollar well items throughout the store creates great price impact and speaks to our customer that many times need this assortment to make it to the end of the month with their budget. And renovations. And the excitement around renovations speaks to the portfolio optimization when we take a look at our fleet of stores. We have 8,000 stores. When we take a look at how we optimize across the fleet, we have our top volume stores that continue to produce a positive comp. We rebanner stores where our metrics show that we will do better as a Dollar Tree than a Family Dollar. And then as always, we take a look at the middle group of stores and target the renovations where we can drive better performance, both top line and bottom line. We're pleased with what we're seeing on the renovations. We had targeted 450 locations this year, and we will do more. We're going to extend that to 500 this year. We can't do them through back half of October, November, December. But we will do 500 this year and are working on setting a higher target for 2019 renovations. Our customers are buying more, and the feedback gives us great confidence to move forward with more of these in the right stores. I believe the right combination of more renovations, along with the foundational elements of our strategy, will drive the traffic and basket that we're looking for, and really, to make meaningful changes to our fleet of 8,000 stores. We continue to focus on making meaningful progress to grow and improve our business for both banners. I feel that we are well positioned to the most attractive sector of retail to deliver continued growth and increase value for our long-term shareholders. The combination of more than 15,000 Dollar Tree and Family Dollar stores provides us the opportunity to serve more customers in all types of markets. This combination of 2 great brands provides great flexibility in managing our future growth. Our teams are ready for an important holiday season and are focused to win in their stores and markets as we enter the back half. Operator, we're now ready to take questions.
Operator:
[Operator Instructions] Our first question comes from Scot Ciccarelli with RBC.
Scot Ciccarelli:
Gary, you talked about the need to improve consistency at Family Dollar in terms of store appearance, organization, et cetera, and that would certainly conform to what we've seen in our store tours. Do you think you've had the full buy-in from your Family Dollar employee base for all the changes that you're trying to implement? And if not, how do you get that full buy-in from the associate base, given the importance of their contribution to the -- what should be improved financial performance?
Gary Philbin:
Well, thank you, Scot. I think you're spot on. At the end of the day, we do this absolutely a store at a time. And it really speaks to, I think, 2 things. I would tell you our leadership, zone, region, district and our store managers that we recognize the ones of superior performance at our field meeting. They're on board. I think the consistency that I'm speaking to is how do we give them the tools to win in their box? And I would tell you, it comes down to a few things that have always been part of our elements to focus on. It's getting people trained correctly, and that still remains the #1 priority in what we've invested in with our tax investment today. Our store manager turnover, while stubborn, has come down a few points, and that's against the backdrop of even a robust economy out there. And if we were to say there's one element that combines great store performance, match that up with a store manager that has stayed in the saddle over a year, that's actually remarkable for both banners, our performance improves. So we're focused on that. When we have store managers leave us before 1 year, we put our folks in that spot that tends to show up in stores in that lack of consistency. And so that's where we tend to see the cracks in the dam. And so we work real hard trying to understand why people leave us before a year, both at Dollar Tree and Family Dollar. But the path is really the same for both. Hire the right folks, get them trained, work through their hurdles. But the other piece, and you sort of touched on, was renovations, too, which then, I think, gives us the chance to sort of jump-start and change that by store and district and region very quickly. And that gives us a chance to go in and spend time with a greater touch in those stores to gain that consistency and the elements that drive traffic and business into those stores. So our focus on investing in our store managers is where we're clearly have our eyes set. It was the theme of our meeting this year, and it's where we expect to see progress over the next year.
Scot Ciccarelli:
That's helpful. And can you just remind us when you started to raise wages for the group?
Gary Philbin:
Well, the investment, we teed up this year. So keep in mind, we're always monitoring where we are by market. I mean, that goes back to even last year. I think we went to this year with the thought, we want -- didn't want to get behind the curve. With unemployment now at 4%, people have opportunities. So it's really targeted by location and in specific markets that are tied to investments in our hourly workforce. And so we kicked that off this year in both banners and putting a little bit of science behind it with where are the markets that have the highest increases going on, or can we affect our turnover in a better way because we give a higher starting wage to the folks that got to run the stores.
Operator:
Our next question comes from Vincent Sinisi with Morgan Stanley.
Vincent Sinisi:
Just on the renovations at Family Dollar. Obviously, has and continues to be a big focus for that banner. I know you haven't really quantified in the past, but can you maybe just directionally give us a little bit of sense from what you guys are seeing post-renovation, how those stores are performing? Are there maybe fewer kind of markdowns at some of those stores if you look from more of the margin end? That would be helpful.
Gary Philbin:
Sure, Vinnie. Thank you. Because we're excited about the renovations. And maybe just want to go back to what I said in my comments, I think we've taken our hard look across all of our 8,000 stores. We've got a group of stores chugging along, giving us a positive comp. They tend to be our highest-volume stores. By nature, our customers have been building business in there and continue to. We've rebannered some that are in between, but the stores in the middle that we can affect to drive comps in, we have an old fleet of stores and we've targeted some of the oldest in the fleet to go after that. But more than that, I think what we're seeing with the renovations is increased traffic and basket. The merchandising layout is different enough in the store to get the customers to come in and really take a look at some everyday needs. We expand frozen food, for instance. But we've also enhanced what we've done on our seasons at Family Dollar, different than Dollar Tree. Summertime becomes much more of a grilling holiday at Family Dollar than it could ever be at Dollar Tree. We have our impulse items both in our Wow tables and up in the front end. And so we're seeing, really, a remarkable pickup for that last dollar our customer might have on something that wasn't on their shopping list. And so we've had mid-single-digit comps in this growing fleet of stores. But as I sit back and take a look at this portfolio of stores, we have got to do more of them to affect change. And that's really going to be our focus for the balance of the year. We're going to squeeze in another 50. I'll do more if we can. We'll be limited a bit by just the holiday. We don't -- try not to attempt to do much in our stores after October. But we'll get to 500, maybe more. And then we have the confidence now with what we've learned to tweak it a bit and go into 2019 with a bigger number on that group of stores, and that's going to be how we end up this year and the basis for kicking off '19.
Vincent Sinisi:
Awesome. Super helpful. And then maybe just as the follow up. I'll stay on the same basic subject. Do you guys think that when you're making enhancements -- I mean, core Dollar Tree is obviously the consistent machine. But when you're making enhancements either to that or particularly Family Dollar more, do you think, in terms of what you're doing from an advertising perspective -- I guess the heart of the question is, do customers realize as kind of quickly as they can of the enhancements that you folks are making? Or do you think maybe there's even more that you could do from that perspective as opposed to just maybe next time they happen to be passing the store? Thoughts around that would be great.
Gary Philbin:
Yes. Great, great question. I mean, unless you do something, your customers never realize what you've done. So for Dollar Tree, at the Snack Zones now, we get a banner out in front of the store. It's on the website. It's word-of-mouth. I would tell you, I see people in the aisles actually FaceTiming their family members at home because they found something that in particular was there. So we've never -- advertising at Dollar Tree is maybe like unlike any other retailer. We want to show people that we have something new, but get a banner out in front and our folks find us. Family Dollar, fair question. I think it's store by store. And so depending on the store in the market, we obviously do everything on the store-level side to show customers, whether that's pennants, banners, big grand openings. And if a store is worthy in terms of what we think it can drive in sales, it probably gets its own ad to do exactly what you've described, tell people what's new, here's why you ought to come. So we sort of gauge that based on the upside opportunity and what we see is the potential and the marketplace that the store is in.
Operator:
We'll take our next question from Matthew Boss with JPMorgan.
Matthew Boss:
So I guess at Family Dollar, if we think higher level, so flat comps for the quarter, same-store sales turned back negative in July. I guess when you break down the components, is it traffic that's the missing ingredient here? And do you foresee any need to take pricing actions to accelerate footsteps? I guess just help us to think about the potential game plan and any changes that you're considering.
Gary Philbin:
Well, it is traffic that -- during the quarter, we actually had a pretty nice basket increase that offset that. But we -- obviously, we got to do both. And so the focus on driving traffic then comes down to some of the things we've mentioned, right? Consistency of stores. But when you -- I sort of come back to how we take a look at the group of 8,000 stores across the portfolio, Matt. The stores that do fine, we want to make sure they're amped up on the right store investments that we've talked about on labor. For our customer -- for the stores in the middle, we want to make sure that we have targeted operational plans to make sure we get them up to brand standard, as always. We can do things specifically to store level. Your comment on where we are on pricing, I would tell you, our pricing shows us in the targeted areas we want to be against our major competitors. Doesn't mean, every once in a while, you got to go and find the right thing for a Family Dollar customer around first of the month and end of the month to drive that traffic. Those are sort of the arrows in our quiver that we can use on a monthly basis. Over the long range, I want to affect more stores to have customers come in the door because they know they have that renovated store at the right way. So our top-volume stores, to me, I think about it as an investment in the things we've talked about, investment in store labor, investment in wages. In the middle, they'll get some of that, but clearly, we get more renovation lift from some of those stores. And as always, we'll take a look at the portfolio optimization and figure out what stores, as they come up for lease, shouldn't be part of the herd anymore. But that will be the process that we think about driving traffic in the back half and impacting '19.
Matthew Boss:
Great. That's helpful. And then just one follow-up. What's the embedded gross margin outlook in the full year guide? I guess maybe even just higher level, help us to think about the headwinds versus tailwinds that you're facing in the back half, maybe at both banners.
Kevin Wampler:
Yes, I think, Matt, as we think about it -- and we've been pretty transparent about the freight headwinds, for instance, we gave initial guidance way back in early March. That will continue. I think as you look at it, it has a little bit heavier effect in Q4 than Q3, and that's just really because of the way the goods flow. You're basically bringing in a lot of inventory now that you sell in Q4, which is when the capitalized freight goes with it, basically. So you'll have some of that. So we know that's going to be there. Obviously, I do believe diesel becomes a little bit less of a headwind as we go through the year, assuming the price stays steady where it is today. If you look at diesel a year ago for Q2, it was about $2.50. It went to about $2.70 for Q3 and about $2.95 for Q4. So diesel does trend up as you go through the back half of last year. So the compare, while still be a headwind, will not be as big of a headwind as we get to the fourth quarter, assuming current rates stay somewhat steady. And it's right about $3.25 right now is where the diesel rate is. So that's the big one, realistically, that we've seen. Shrink, again, has been a headwind. Again, it dissipates a little bit as we go to the back half, but it'll still be a headwind as well. The good thing is, as we talked about on the Dollar Tree side, the mix has been very good. The -- we've had a very balanced sell on consumables and discretionary. And when we see that, we tend to like that on our overall margin, when we're able to get those nice comp sales in our discretionary categories. So a lot of puts and takes. On a comp basis, as we saw this quarter, we don't -- we're not able to leverage our Family Dollar overall occupancy cost; we are able to leverage for Dollar Tree. So some puts and takes for each banner. But again, there will continue to be some pressure as we go through the back half.
Operator:
Our next question comes from Judah Frommer with Crédit Suisse.
Judah Frommer:
So first, maybe given the differences in the Dollar Tree and the Family Dollar banner in terms of how they're shopped and the core customers there, can you help us out with what you're seeing from, I would say, kind of the middle and the low-income consumer? Clearly, very good traffic at mass merchant, and Dollar Tree probably benefited a bit from that. But any insights into maybe that lower-end consumer would be great.
Gary Philbin:
Sure, Judah. Thank you. I would say Dollar Tree, and because of the geography and where the store sites are, you've heard other retailers call it out, and I think Dollar Tree feeds off that. Our customers are coming in, I think, with a little more to spend, basically middle class and above. And the opportunity is there to spend a little bit more, and we're seeing that both in traffic and basket at Dollar Tree. And it just sort of makes sense when we take a look at the anchors we're next to and we hear them report and we compare that to how we're doing it with the same anchors, and pretty good correlation there. So that feels pretty good to us. I think with the Family Dollar customer, we do serve a needs-based customer. It is different. I think always as we've talked about, we're there to try to provide a solution for a budget from beginning of the month to the end of the month. Much more consumable-driven, which is showing up in the consumable comp we have. I think the stubborn part for us there has been discretionary. And in May, we were really encouraged. Obviously, spring, early summer got to a late start because of weather in Q1 that everyone had talked about. May, we really saw pop up. And I think it was a couple of things. I think, clearly, people were probably behind on warm weather purchases at that point. But I think it also spoke to, at Family Dollar, because sales were delayed, every store sort of had their best assortment right there at the beginning of May. And the comps we saw at that point across discretionary, I think, sort of point to when it all gets into the store, and it looks as good as we hope or close to it, our customer responds. I think as we went through the summer, as assortments break down or we run out of something here or there on our assortments, especially on the discretionary, that's where we lose steam, and I think that's on us. But that's something we can fix, that's something we can control. But I think this lower-income customer, listen, we're very sensitive to it. Utility bills have been higher this summer because of all the heat across the country. And rents, if you take a look at any trend that I do, it still shows rents that are continuing to go up 3 years going now, so that's money out of their pockets. So we can do better to get those dollars and appeal to them to buy across our entire store, that's our focus. But I want us to always be sensitive to making sure we have opening price point for this customer when they come in our store. When they have to spend the extra $20 on a utility bill, we ought to be there to find a solution to make that somehow ease the burden of them of stretching out their budget for the back half of the month.
Judah Frommer:
That's helpful. And maybe just a quick follow-up. I know we're not talking about synergies much anymore, but as you talk about kind of shipping for both banners out of your new DC, is there supply chain opportunity we can think about as we continue in kind of the integration there? Or is it going to be kind of new DCs will maybe act differently than historical ones?
Kevin Wampler:
Yes. I think we've pretty much said from day 1 that supply chain was a little longer-term project as we think about it from rightsizing, rationalizing, getting everything in the right place at the end of the day. And again, as you could see, the new building in Warrensburg, Missouri, has been built such that today, it's servicing Dollar Tree stores, but it can be co-bannered and service both. With again, from a stem-mile perspective, it's always going to be beneficial. I think there's things we continue to look at in supply chain. Automation is one of those, and how do you use automation to bring your overall -- what we really look at is cost per case, how much is it costing us to move a case through the distribution network at the end of the day? So there is opportunities, things that we're working on and looking at, and really should have an opportunity to continue to move forward with some of those as we go forward. It'll be some capital investment to do some of these things, but I think there's the return on it that would -- we would believe will make it worthwhile.
Gary Philbin:
Judah, I would just add also, capacity issues have really been on the Dollar Tree side as we rebannered stores, converted Deals stores to Dollar Tree. We had needed the firepower on the Dollar Tree side, so that's the other reason that Warrensburg will serve as Dollar Tree initially.
Operator:
We'll take our next question from Joseph Feldman with Telsey Group.
Joseph Feldman:
Wanted to follow up with you guys on something regarding the tariffs. I know these are -- we haven't seen them all implemented yet, and there's another $200 billion talked about and it could be 10% or 25%. But $0.04 for ribbon alone seems like a lot to me. Could you give a little more color around that? And kind of what it would look like potentially if at least the current list that's being proposed was implemented?
Gary Philbin:
Yes, Joseph. Just to be clear, I think there's a difference here. What we talked about is the antidumping duty, which was a specific ruling by the Commerce Department against ribbon from China. They had a dumping duty of 380%. That's 380%. And as ruled on August 3rd or 8th, somewhere in that time line, well, orders for the holidays had already been written 6 months before and in-flight and on boats and on trucks. That's completely different than the tariff piece, which is being considered at 10% or 25%. So don't mix up the 2. The dumping duty is a 1-company issue on Chinese ribbon. That's what the effect is on the $0.04, based on that 380%, different than the tariff 301 that's being considered at 10% and 25%. Makes sense?
Joseph Feldman:
Yes, that's very helpful. And then a quick follow-up. I know -- I fully understand the vast number of stores that you guys operated with Family Dollar, and you are accelerating some of the Family Dollar renovations. But what -- how do you accelerate it further? Like, how do you get to 1,000 stores in a year or 2,000 stores even in a year? Like, because it seems that, that's one of the gating factors. Is it just the human capital issue? Or is it -- are there other things maybe that you could streamline to speed that up?
Gary Philbin:
I think you're exactly right. I mean, the optimization of this group of stores. We can impact more stores in the 500 this year, and everything you just suggested, we're going through budget season now. What's it going to take us to do more? And how many more is that? We're not lacking capital. We certainly want a great return for any $1. We want to be prudent managers of capital. But this is what we got to do to change the impact for the fleet of stores. And so anything, we'll overcome all of it. We'll figure out the right stores. We'll figure out how many people we need to put against it. Obviously, that's -- it's not the only limiting thing you got to consider, but you certainly have to plan it. But I think you're spot on, how do we do more? That's how we're going to change what we're -- how we affect our fleet of stores, and really, how we affect our customers at the end of the day to buy more and have more of them come into the store.
Operator:
Our next question comes from Robbie Ohmes with Bank of America Merrill Lynch.
Robert Ohmes:
Actually, my question is on the Family Dollar gross margin, and if you could give us more color on how to think about that for the rest of the year, down 150 for this quarter, and you -- it looked like merchandise cost pressures and freight was the biggest driver of that. Should we be assuming that type of rate decline for the back half? And then also, just looking out over the next couple of years, could you remind us how you're thinking about the gross margin at Family Dollar?
Kevin Wampler:
Robbie, as we look to the back half, as I stated earlier, there will continue to be pressure, and freight is the biggest pressure item, less in Q3 than in Q4. And again, that's timing of inventory coming into the system and then when it's sold. But the belief is that the effect will be somewhat less than it was in Q2 as we sit here today. So that's how we're thinking about it. But there will continue to be pressure, and really, the freight is the biggest impact. We were -- in Q2, we actually saw our markup was up. We did have a fairly significant shift to consumables in the mix, about 60 basis points more in consumable sales than 1 year ago. So overall, we feel pretty good about how we navigated through that. But again, our needs-based customers are liking what they're seeing from a consumable standpoint. And as far as long term, obviously, as we've said, the freight item this year is one of those shock to the system type items that we have to deal with and manage through. And we'll do that. Obviously, the expectation is we're going to drive the gross profit up as we go forward. That's the way we view it. Obviously, there's a lot of things that have to happen. We can definitely do better in shrink. We're not happy with our shrink performance this year in either banner, so there's an opportunity there. I think from the standpoint of distribution cost, again, as I mentioned on the earlier question, we believe there's opportunity there. So there's going to be opportunities. It's just putting that together. But at the end of the day, to Gary's point, driving renovations, driving sales, creating leverage on line items will be helpful as well. So I think that's the general thought process.
Gary Philbin:
Robbie, I'd just add color. I know you asked about long term. I mean, we're going through a year here where the shrink bogeyman is in the room with us. We're going to get that one licked. Freight is a real thing this year, but it's not going to be forever, and we're going to find a way to mitigate it until it does get better with the external forces at work. So I sort of feel the pain right now. It's not going to be a forever thing. And our discretionary business at Family Dollar is going to be the way that we -- one of the ways we expand margin. As we do the renovations, that drives margin expansion in those stores, but we still have to get better on that side of the business. It's there to be had for us. And the levers that we've talked about on private brands and import are just as true now as when we started out. And that's what our teams are working on.
Robert Ohmes:
Gary, that's helpful. And one just follow-up question. In the second quarter, if you look at the largest U.S. retailers like Walmart, Target, Costco, some of them put up some of the best traffic comps in a long time. I would love to just get your perspective on where both of your banners kind of fit into an environment like we saw in the second quarter, where the traffic really just accelerated, for example, at Walmart.
Gary Philbin:
Well, I would say, listen, we like a healthy customer. I mean, we're in the same arena, especially at Dollar Tree. And I think our 2-year stacks at Dollar Tree, we're pretty proud of. So I think that speaks to everything that they've been talking about, about what they see and the health of the customer. And I think even at Family Dollar as we started off the quarter, we certainly had thoughts that if we were going to extend what we saw early on, we'd be having a different conversation now. But that -- we serve a different customer at Family Dollar. We serve a little bit of everyone. But I go back to it's a customer that is on a different kind of budget than most of us can think about. And we get graded every first of the month on do we have the items that she needs then. And at the end of the month, do we have the items, opening price point, oftentimes, that allows her to get towards the end of the month. It's not the same rising tide for the customer at Family Dollar. And we owe it to ourselves, and really, to our customers there to make sure what we put in front of them will resonate with them. It's showing up on the consumables side. We like our business there. I mean, we're getting graded pretty well there. And we're working real hard on the discretionary things, that it's sort of that one more purchase that we need at a Family Dollar store to make all the difference in the world. And then do that against the backdrop of consistency, merchandising energy in the store, let's push the heck out of renovations for the balance of this year and next. And I think that's the magic sauce we need at Family Dollar.
Operator:
And we'll take our final question from Dan Wewer with Raymond James.
Daniel Wewer:
Gary, I think probably on every conference call during the last couple of years and probably most of your investor meetings, the question about pricing for Family Dollar has come up. It came up again earlier on this call. And the company always communicates that pricing is better than it was a few years ago. We have Smart Ways to Save, better in caps, et cetera. But is there a philosophical reason why Family Dollar doesn't adopt a pricing strategy of, let's say, being equal to or maybe no more than 3% above Walmart on national-branded consumable items?
Gary Philbin:
Well, philosophically, Dan, I think we sort of take a look at the major competitors we go against in the market. I mean, obviously, when we're close in the trade area of Walmart, they become one of them. They're not in every market we have. So we take a look at either win on specific items or match or something that, is it important to our Family Dollar customer, based on how we see sales flow to the store, we make those judgments. Clearly, what comes through loud and clear from every research we've ever done and we continue to see is opening price point at Family Dollar. And sometimes, that's a $1 item, but not all the time. And those are the items that we've really got to be right on with our customer. And so those are the elements that, when we take a look at the baskets that our customer buys -- and I still go back to consumables. We have a large number of KVIs like everyone else. And what we see in our consumable business is driving that comp now for 7 consecutive quarters. So I'm not going to put together the thesis of all of our pricing strategy on the phone call today, but I think those are the elements that allow us to drive that kind of a comp on the consumables side. And I would add maybe one other piece for our customer. You've heard me talk about it, too, at every conference. What we do at first of the month and end of the month at Family Dollar are 2 different things. And that's important, too, for our customer, how we merchandise, what's in the ad, how we affect them with the smart coupons, which continues to grow. And I think it's not something we talked a lot about, but we're always surprised by how many customers have signed up. Well, one, because our customers have just as many smartphones now as the average in the U.S.; and number two, they see the items offered to them that make the most sense. And you've heard me give the examples before on that at conferences. So it's not just what's on the shelf, it's that plus what's in the ad, promoted. It's our Price Drop. It's the $1 Wow our customers sees -- go through the store with. So I view it as a recipe we go to market with, never taking a look at one item, but making sure that our pricing strategy is spot on with how we want to affect our customer base.
Operator:
And that concludes the question-and-answer session. I would like to turn the call back over to Mr. Randy Guiler for closing remarks.
Randy Guiler:
Thank you for joining us for today's call. Our next quarterly earnings conference call to discuss Q3 results is tentatively scheduled for Thursday, November 29, 2018. Thank you, and have a good day.
Operator:
And that concludes today's presentation. Thank you for your participation, and you may now disconnect.
Operator:
Good day, and welcome to the Dollar Tree, Inc.'s first 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.
Randy Guiler:
Thank you, Jonathan. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the first fiscal quarter of 2018. Participating on today's call will be our President and CEO, Gary Philbin; and our CFO, Kevin Wampler.
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. These are included in our most recent press release, most recent 8-K, 10-Q and annual report, 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. [Operator Instructions] Now I will turn the call over to Gary Philbin, Dollar Tree's President and Chief Executive Officer.
Gary Philbin:
Thanks, Randy. Good morning, everyone. Thanks for your patience. This morning, we announced our results for our first quarter of fiscal 2018. Sales increased 5% to $5.55 billion. Our consolidated same-store sales increased 1.4%.
By segment, comp sales for the Dollar Tree banner increased 4%, and for the Family Dollar banner, comp sales decreased 1.1%. Our enterprise gross margin rate declined 20 basis points to 30.6%. Operating income increased 12.6% to $437.6 million. And excluding costs associated with our recent refinancing and the prior year's $50.9 million receivable impairment, adjusted earnings per share increased 21.4% to $1.19. Our teams in both banners worked hard to deliver top line sales and bottom line results that were within our guidance range for the quarter when adjusted for the debt refinancing. We started the year knowing we needed to overcome an early Easter. Our teams faced some significant hurdles and freight cost pressure above our initial estimates in the quarter and the disruption of business, especially at Family Dollar, from a wetter and colder-than-expected spring. Faced with these issues, I'm proud of our banners and teams' efforts to overcome these hurdles. By our business segments, for Dollar Tree, we had a positive quarter of 4% comp, now the fourth consecutive quarter of comps greater than 3.5%. Family Dollar comps, while negative, had positive consumable comps, now the sixth consecutive quarter of positive comps for the consumables side of our business. Our Dollar Tree Canada team exceeded its plan for operating income, driven by improved margins and expense leverage. And our Dollar Tree Direct online business delivered double-digit comp increases in both sales and site visits. In our Dollar Tree banner, for the first quarter, our top-performing categories were candy, snacks and beverage, beauty and eyewear, health and personal care, and household consumables. Our sales performance was very balanced, with discretionary slightly outperforming consumables. February same-store sales were in line with the comp for the quarter. March was a strong positive, and April was down year-over-year as expected. Both March and April comps were affected by the earlier Easter, April 1 this year compared to April 16 last year. Geographically, Dollar Tree same-store sales growth was strongest in the Southwest, West and Southeast, and all of our zones delivered positive comps at or greater than 3%. We're really pleased with the Dollar Tree banner's comp store sales results in a quarter that had the disruption of winter storms, an early Easter and spring's weather's arrival that seemed later than most years. Our 4% comp was a remarkable result from all of our store teams and our merchants. Our merchant teams again hit the mark on incredible values and assortment. We had some to make up for an early Easter, and we moved the needle across both our discretionary and consumable categories. Over the past year, the Dollar Tree merchant team has developed and tested an initiative for select stores which we call Snack Zone. The Snack Zone is designed to provide customers with compelling assortment of immediate consumption products at the $1 price point to drive incremental sales. Our customers are excited with the introduction of the Snack Zone, great values across categories of cold beverages, candy, snack cakes, salty treats, other favorites that bring our customers back to those treats that they crave. We're excited about these incremental sales and additional foot traffic that they generate in the stores where installed. During Q1, we added the Snack Zone to 214 Dollar Tree stores and have plans to launch this initiative into 750 Dollar Tree stores in fiscal 2018. For the Family Dollar banner in the first quarter, while we did not achieve our intended target on comps for the quarter, we continue to make progress around our assortment, marketing and store renovation program. Our pressure on comps was nearly all due to misses in apparel and lawn and garden, our 2 departments that got off to a slow start with the colder-than-normal spring and early Easter.
However, the following highlights continued to show strength in the underlying business. Top-performing categories included:
refrigerated and frozen food, school and office supplies, snacks and beverage. Our comp performance was again driven by consumables, and I'm pleased with our progress across these categories as it speaks to the relevance and items that our customers need most and count on Family Dollar to deliver weekly.
Our sales cadence through the quarter, comp sales were strongest in March and softest in April, as expected, with the impact of the Easter holiday timing shift. Geographically, Family Dollar same-store sales for the quarter was strongest in our Northeast and West zones. We also worked during the quarter to reset and highlight Beauty Care. It's an important category for our primary loyal customer and has been very well received, and we've seen strong comps in the stores completed. Our expanded assortment has turned this category positive dramatically in March and April despite the Easter shift and cooler temperatures. Our increased inventory levels at Family Dollar represent our measured investment of additional inventory in key departments to drive better in-stocks, along with the timing of several resets that were in motion. We expect this to decline over the year from current levels. Our customer-facing program to refresh our value message at Family Dollar is Smart Ways to Save. When you visit a Family Dollar store, view a marketing circular or check our website, you will see a consistent value messaging. It's all across our Smart Ways to Save; EDLP pricing for everyday value; price drops that reflect meaningful value on promotional items; our $1 Wow items, which drive surprise value and an opening price point across our stores; and Compare and Save calls out great values on our private brands; and our Smart Coupon program supports us with our messaging. During the quarter, we had more than 900,000 new customers sign up for Smart Coupons, now bringing our total enrollment to over 6 million since the program was launched chain-wide in 2016. Our Family Dollar mobile app makes it easier for customers to use Smart Coupons. 2.9 million customers now have downloaded the app, and we are receiving strong reviews on both Android and Apple operating systems. We continue to gain traction on the new private brands that we've been introducing across the chain. These brands have been developed to provide national brand comparable quality and meaningful savings to support the Compare and Save component of our Smart Ways to Save program. Our customers know they can count on the quality with our 100% customer satisfaction guarantee. We've completed the rollout of new brands in the consumables category and are well underway with changes being made in our apparel and home categories, which should be complete by the end of Q2. These brands provide customers with an alternative at even greater values. Our goal is to drive traffic and loyalty while enhancing profit margins. During the first quarter, we completed another 215 Family Dollar store renovations, bringing our total to 592. We continue to be very pleased with the initial results we are seeing in these newly renovated stores and especially about the feedback we are receiving from our customers and store teams. The renovated stores provide our customers with a better Family Dollar shopping experience; better shopping adjacencies and more productive meaningful endcaps; expanded beverage and snacks, including immediate consumption coolers near checkout; added assortment of food in coolers and freezers; updated hair care assortment; expanded adult beverage in select stores; a shopper-friendly power alley to emphasize $1 Wow items; and a faster checkout process for the customer. Our store teams are working hard to be the neighborhood store of choice for the fill-in shopping needs of our Family Dollar customers that typically live, work and shop near our stores.
Highlights for the quarter at Dollar Tree Canada include:
the team delivered mid-single-digit positive comps for the quarter. We saw increases in both ticket and traffic. April was the softest month of the quarter due to the earlier Easter. Both discretionary and consumables comped better than 4% for the quarter. Top-performing categories included lawn and garden, floral and kitchen textiles. And operating income was slightly ahead of plan, driven by the margins and overall SG&A leverage. A focus on our people, retention and building on operational leadership capability continue to be fundamental to driving solid results in Canada.
Dollar Tree Direct is our selling website for the Dollar Tree banner, which provides opportunities for enhancing our customer base, driving incremental sales, extending brand awareness and encouraging in-store visits. Q1 represented another productive and profitable quarter for Dollar Tree Direct, with double-digit increases in both sales and website traffic. Conversion rates increased for both desktop and mobile during the quarter. Our online videos earned more than 1.6 million views during the quarter, highlighted by our new seasonal product videos associated with Easter and highlighting our expanded assortment of frozen foods. In Q1, our e-mail subscriber database exceeded 3.4 million customers. They have opted in. Our e-mail subscribers are brand loyal and are excited to be the first to know of great values and selections we offer every week. Our Q1 marketing was heavily focused on spring, Easter and early summer, with the goal of driving both in-store traffic and online sales. Check out both websites at dollartree.com and familydollar.com. Looking at real estate for the first quarter. We opened a total of 130 new stores, 68 Dollar Trees, 62 Family Dollars. We relocated or expanded 26 stores, 24 Dollar Trees and 2 Family Dollars. And we renovated 215 Family Dollar stores as part of the renovation initiative for a total of 371 projects during the quarter. We also added freezers and coolers into 104 Dollar Tree stores during the first quarter, bringing our total of Dollar Tree stores with freezers and coolers to 5,311 stores. During the quarter, we closed 5 stores, 2 Dollar Trees and 3 Family Dollars. And we ended the quarter with 14,957 stores, 6,716 of them being Dollar Trees, 8,241 Family Dollars. I will now turn the call over to Kevin to provide more detail on our first quarter performance and our outlook for Q2 and fiscal 2018. Kevin?
Kevin Wampler:
Thanks, Gary, and good morning. Total sales for the first quarter grew 5% to $5.55 billion, within our guidance range of $5.53 billion to $5.63 billion. Dollar Tree segment total sales increased 8.3% to $2.78 billion, and Family Dollar segment total sales increased 2% to $2.77 billion.
Enterprise same-store sales increased 1.4%. On a segment basis, same-store sales for the Dollar Tree banner increased 4% or 4.1% when adjusted for Canadian currency fluctuations, and the Family Dollar banner decreased 1.1%. Overall gross profit increased 4.5% to $1.7 billion for the first quarter of 2018 compared to the prior year's quarter. As a percent of sales, gross profit margin declined 20 basis points to 30.6% versus 30.8% in the prior year's quarter. Gross profit margin for the Dollar Tree segment was 34.5% for the first quarter, a 40 basis point decline compared with the prior year's first quarter.
Factors impacting the segment's gross margin performance during the quarter included:
shrink costs, which increased 30 basis points; merchandise costs, including freight, increased 20 basis points due to higher freight costs, partially offset by increased sales of higher-margin variety items; distribution costs increased 15 basis points, primarily from higher distribution center payroll costs; and these were partially offset by occupancy costs, which decreased 20 basis points, resulting from leverage from the comparable store sales increase in the quarter.
Gross profit margin for the Family Dollar segment was 26.7% during the first quarter compared with 26.9% in the comparable prior year period. The 20 basis point decline was primarily due to occupancy costs, which increased 45 basis points due to loss of leverage from the decrease in comparable store sales; shrink costs, which increased 30 basis points; and distribution costs increased 10 basis points due to higher distribution center payroll costs. These were partially offset by markdowns, which decreased 40 basis points, resulting from fewer promotional markdowns; and merchandise costs, including freight, decreased 30 basis points, resulting from higher initial markdown, partially offset by increased freight costs. Consolidated selling, general and administrative expenses as a percentage of net sales in the quarter improved 70 basis points to 22.7% from 23.4% in the same quarter last year. Excluding the $50.9 million receivable impairment from the prior year's quarter, SG&A as a percentage of sales increased 20 basis points from an adjusted 22.5% in the prior year's quarter. The increase was driven by higher store payroll costs, partially offset by lower depreciation. First quarter SG&A expense for the Dollar Tree segment as a percentage of sales was consistent to the prior year at 22.6%. Store hourly payroll costs increased 30 basis points related to our Tax Cuts and Job Act savings reinvestment plan. This increase was offset by lower depreciation and utility costs. SG&A expense for the Family Dollar segment as a percentage of sales was 22.8% compared to 24.2% the prior year's quarter. Excluding the $50.9 million receivable impairment from the prior year, Family Dollar SG&A as a percentage of sales increased 50 basis points. The increase was a result of a 65 basis point increase in store hourly payroll expense that was slightly offset by lower depreciation expense. Operating income for the enterprise increased to $437.6 million compared with $388.8 million in the same period last year. Operating income margin improved 50 basis points to 7.9% for the quarter from 7.4% in last year's first quarter. Excluding the previously mentioned receivable impairment to prior year's quarter, adjusted operating margin was 8.3%. Operating income margin for the Dollar Tree segment declined 40 basis points to 11.9% when compared to the prior year quarter. And operating income for the Family Dollar segment increased $34 million, to $107.4 million. Excluding the prior receivable impairment, operating income decreased 70 basis points to 3.9%. Nonoperating expenses for the quarter totaled $230.2 million, which was comprised primarily of net interest expense and costs associated with the recent refinancing of the company's debt. Our effective tax rate for the quarter was 22.6% compared to 36.1% in the prior year period. The lower rate is a result of the Tax Cuts and Job Act, which lowered the federal rate to 21% from 35% in the prior year. For the first quarter, the company had net income of $160.5 million or $0.67 per diluted share compared to the prior year net income of $200.5 million or $0.85 per diluted share in the prior year's quarter. This year's Q1 included $0.52 of costs associated with our debt refinancing, and last year's Q1 reported earnings included $0.13 per share of receivable impairment charge. Excluding these items, adjusted EPS grew 21.4% to $1.19 from an adjusted $0.98 per share in the prior year's quarter. Today's press release includes a reconciliation of non-GAAP financial measures for details on the adjustments. Combined cash and cash equivalents at quarter end totaled $475.2 million compared to $1.1 billion at the end of fiscal 2017. Our outstanding debt as of May 5, 2018, was approximately $5 billion, a decrease of $1.3 billion from a year ago. During the quarter, the company entered into a new credit agreement consisting of a $1.25 billion revolver and a $782 million term loan facility. Additionally, on April 19, the company completed a registered offering of $4 billion and several tranches of investment-grade notes. The company used the proceeds to repay its acquisition notes. In connection with the refinancing, the company paid $114.3 million of prepayment fees, expensed $41.6 million in unamortized noncash deferred financing costs and incurred a net $4.6 million of interest on the new notes prior to the repayment of the acquisition notes. These onetime costs, as detailed in the reconciliation of non-GAAP financial measures in today's earnings release, reduced GAAP EPS for Q1 by $0.52 per diluted share. The company expects to save approximately $48 million in annual interest expense going forward. The interest savings for Q2 to Q4 of fiscal 2008 (sic) [ 2018 ] will equate to approximately $0.13 of earnings per share. Inventory for the Dollar Tree segment at quarter end increased 7.9% from the same time last year, while selling square footage increased 4.3%. Inventory per selling square foot increased 3.4%. We believe that current inventory levels are appropriate to support the scheduled new store openings and our sales initiatives for the second quarter. Inventory for the Family Dollar segment at quarter end increased 16.9% from the same period last year and increased 14% on a selling square foot basis. At quarter end last year, inventory was down 3% in total and 4.2% on a selling square foot basis. The increased levels in the current year represent our continued work to support in-stock levels as well as inventory for several category resets. Capital expenditures were $180.9 million in the first quarter versus $110.3 million in the first quarter last year. For fiscal 2018, we are planning for consolidated capital expenditures to range from $875 million to $890 million, consistent with our initial 2018 outlook. Depreciation and amortization totaled $151.6 million for the first quarter and $153.9 million in the first quarter last year. For fiscal 2018, we expect consolidated depreciation and amortization to range from $610 million to $620 million.
Our updated outlook for fiscal 2018 includes the following assumptions. Calendar considerations for the year include the following:
2018 is a 52-week year. The 53rd week in Q4 of 2017 added $406.6 million to sales and approximately $0.21 to earnings per share.
Halloween shifts from Q4 into Q3 in 2018. We expect continued pressure on store payroll based on states' increasing minimum wages. Additionally, as previously discussed, we continue to invest in store hours and average hourly wage rates as part of our $100 million investment into our business from our projected $250 million tax benefit. We expect higher freight and diesel costs to continue. These costs are trending higher than our original guidance, and we reflected that in our updated outlook. We'll continue to work to mitigate these increases as we go forward. Net interest expense will be approximately $47 million for Q2 through Q4. Our guidance does not include any share repurchases. We cannot predict future currency fluctuations. We have not adjusted our guidance for changes in currency rates. Our guidance assumes a tax rate of 19.8% for the second quarter and 22.2% for fiscal 2018. And weighted average diluted shares counts are assumed to be 238.7 million shares for Q2 and 238.9 million shares for the full year. For the second quarter, we are forecasting total sales to range from $5.47 billion to $5.57 billion and diluted earnings per share in the range of $1.07 to $1.16. These estimates are based on a low single-digit same-store sales increase and year-over-year square footage growth of 3.3%. For fiscal 2018, we are now forecasting total sales in the range between $22.73 billion and $23.05 billion based on a low single-digit same-store sales increase and 3.7% square footage growth. The company now anticipates net income per diluted share for full fiscal 2018 will range between $4.80 and $5.10 compared to the company's previously expected range of $5.25 to $5.60.
The updated annual guidance range includes the following factors:
$0.52 per share of onetime costs associated with the company's first quarter debt refinancing, $0.13 per share of benefit related to expected interest expense savings from the refinancing, $0.04 per share benefit for an expected reduction in second quarter corporate tax rate and $0.09 per share of expected costs from continued pressure related to freight and shrink expense.
I'll now turn the call back to Gary.
Gary Philbin:
Thank you, Kevin. We continue to focus on and make meaningful progress to grow and improve our business for both banners. And now we are well positioned in the most attractive sector of retail to deliver continued growth and increase value for our long-term shareholders.
The combination of nearly 15,000 Dollar Tree and Family Dollar Stores provides us the opportunity to serve more customers in all types of markets. This combination of these 2 great brands provides great flexibility in managing our future. Now to the timing shift of the holiday and colder-than-normal spring weather behind us, we have seen a pickup in sales trends at both Dollar Tree and Family Dollar in May. Still early in the quarter, but it's gotten off to a positive start for both banners, and I'm pleased with the kickoff to the summer season. We expect to continue to see pressure on freight costs, both inbound and outbound, for the foreseeable future. We are taking action to minimize the impacts of these costs. Also, we are seeing diesel costs run higher than a year ago and higher than we had planned. Both of these cost pressures are included in the outlook. Our ocean freight rates negotiated in April came in lower than originally planned. We should see the -- we should begin to see the benefits of the lower-than-anticipated rates in the back half of the year. This was also contemplated in our updated outlook. As we detailed last quarter, we are investing in our business with more labor hours in the stores, more competitive wages and benefits and in-store standards. We are investing in these specific areas because we believe they will drive our business and create a better opportunity for our stores. I'm counting on our teams to be able to drive a better experience and more sales. Our Q1 performance was a bit of 2 stories. The Dollar Tree segment, strong, resilient, relevant, bounced back after the weather and planned for and overcame in early Easter. I was really pleased with all of our teams' efforts and achievement.
Family Dollar was impacted particularly hard by weather in 2 of our seasonal assortments in the spring:
apparel and lawn and garden. In comparison, Family Dollar consumables business comped positive in Q1.
I'm pleased with the results and efforts we are making in rebuilding our brand and relevance to our customer around a better shopping experience, greater value and convenience, as demonstrated by Family Dollar's good start to the second quarter. As we move into the summer season, our store field teams, merchants and support teams are focused on our initiatives and the basics to deliver our banner and company goals. Operator, we're now ready for questions.
Operator:
[Operator Instructions] Our first question comes from Matthew Boss with JPMorgan.
Matthew Boss:
I guess, Gary, on the Family Dollar front, how best to think about same-store sales in the quarter maybe versus your internal plan? And if we took a multi-year view here, is there anything structural that you've identified with the concept that changes the way that you look at the productivity opportunity today and maybe how you did -- versus how you did a year or 2 ago?
Gary Philbin:
I don't think so. I think we're still -- Matt, we're still building the business. It's obviously fragile. So I think for this low customer -- low-income customer that we serve in particular areas at Family Dollar, when we do get disruption, which we could point to some of the weather impacts, our customer just doesn't buy some of the categories that I pointed out until she really needs it. And so when I take a look at Q1, part of it just being the fact that it was the weather, I think there's nothing structurally. We see the renovations continuing to make progress as we change what the customer sees and the fleet of stores. We continue to see private brands drive our business when we change the labels and introduce them to our stores. And we're going to continue to invest in stores. And that's a little bit of labor. It's going to be the capital that we invest. That's going to be the long-term structural change. I think what -- if I take a look at Q1 to Q2 and I can point to the things that impacted our sales across those categories, hey, now that's warm -- guess what, the warmer weather items are selling like we thought and they had the swing from what we saw in Q1 to driving some of the comps -- positive comps that we're seeing at the start of Q2. So it's -- to me, it's -- everything we talked to you at the beginning, whether the fundamentals are going to drive our customer value, let's get our pricing right. That's everything that Smart Ways to Save brings to the party across our store, from being EDLP to private brand to $1 Wow that's improved the store experience, and some of that's going to be capital with changing the fleet. And at the end of the day, it's going to be investing in our store folks so we can run great stores in all 8,000-plus Family Dollars.
Matthew Boss:
Great. And then, Kevin, on gross margin at the Family Dollar concept, aside from the sales-related occupancy you leveraged this quarter, which is -- if that makes sense, can you just walk through any differences versus your plan on the gross margin front at Family Dollar and how best to think about this line item and drivers as the year progresses?
Kevin Wampler:
Yes, Matt. I think, obviously, the other big callout is shrink really for both banners. But as I noted in our prepared remarks, both banners were affected by approximately 30 basis points negatively in gross margin [indiscernible], which is very significant, from our perspective. So we have to -- obviously, our teams are engaged and working to understand the issues. The one thing about shrink is once you see a trend, it does take a little while typically to reverse one of those trends. So that again plays into the way we think about going forward the rest of the year. So that's obviously a big game changer, from my perspective. The other thing is obviously, and we've spoken to freight, it's trended a little higher than what we spoke to at the beginning of the year, again, a lot of it being related to driver issues, which -- and then basically affects backhauls as well and the efficiencies we're able to gain or not gain from that. So those are the 2 areas that will probably be the callouts that I would say.
Operator:
Our next question comes from Michael Lasser with UBS.
Michael Lasser:
So when we look at the spread between Family Dollar same-store sales and Dollar General same-store sales that also reported this morning, that expanded to 320 basis points. And we have seen pretty steady expansion in that spread for the last couple of years now. And it's not a completely clean number, but it really is the only way that we have to benchmark the influence that the team's having over its own performance. So why do you think that spread is expanding and was larger in the first quarter than it's been at some time?
Gary Philbin:
Michael, it's Gary. So let me take this one. I think everything we have our teams working on are going to be the fundamentals over the long term, change that dynamic. So it starts with the top line. Everything that we do to drive that ought to be showing up in comp store sales. I think in Q1 though, just for Family Dollar, where our customers are served in urban settings, it is my opinion their shopping habits, travel patterns get more disrupted, more -- perhaps more easily with some of the weather. And if you're low income, you don't buy at some of the segments that we have, apparel being the biggest one, that says, "When you buy short sleeve and dresses for Easter and when there's snow on the ground, it just doesn't work to the same way at a Family Dollar store." So yes, I sort of want to bucket Q1 into the things that we can sort of point to because we could see that -- the categories that were impacted by the weather. And when we compare year-over-year, the segments that were out there that should have been performing, you could say, "well, there's another winter storm." So that's a piece of it. I think structurally, longer term, it's still everything we've been talking about. We've got to continue to have renovated stores that will drive comps. Those are the elements that, behind comp store sales for any banner, at the end of the day, will help us drive comps. What they'll do is improve the adjacencies, get the right square footage in-store for the right departments. That's just the work that's out there that we have to do to improve comps structurally quarter-over-quarter. So Q1 is what it is. We've cinched our belts up a notch going into summertime. We believe we had the right assortment. And when it got a bit warmer, we started to see that respond. So we're not going to judge it by one quarter. We're going to take a look at the whole year with our plans and continue down the path of the things that we know our customer responds to, which is a better store because it's been renovated or expanded frozen food doors because I get more the assortment I need. And along the way, we're taking a look at the assortments and categories to create more value in there, whether it's more private brand or whether it's assortment gaps that we need to improve, and that will never stop. And along the way, for us at Family Dollar and Dollar Tree, it still drives a lot of it based on what we do once a year on -- going on our import trips by season. We go multiple times a year, of course. But I think when you take a look at the Dollar Tree comp of 4% year-over-year with those headwinds, this is -- that same kind of energy can work at a Family Dollar because where it relies on us more on basics. She does need us at the beginning of the month and in a different way at the end of the month. But it's going to be those fundamentals that drive a more consistent comp over time.
Michael Lasser:
And presumably, a piece of the equation with Family Dollar is a lower penetration of the coolers and freezers, some of the consumable products that drive traffic. Do you have any plan to accelerate and really act with a greater amount of force to roll out more coolers and freezers to provide more consistency in the traffic of that business?
Gary Philbin:
Well, I think we have a pretty aggressive project plan this year between both banners. We're going to be touching well over 1,000 projects. I think we are doing it in an accelerated fashion, both with the renovations, which are bigger projects at Family Dollar, along with the impact of additional doors, mainly around frozen food, exactly to your point. So that's in the hopper, and that's what we're continuing to work on for this year. So I think it's a key point. Our customer does rely on that category maybe more than others do because of what it does for both snacking and meal planning for her on different weeks of the months. So that's in the plans.
Operator:
Our next question comes from Dan Wewer from Raymond James.
Daniel Wewer:
Kevin, I just wanted to confirm that I heard correctly the Family Dollar inventory was up 14% per square foot. Now if that's correct, it looks like the projected payback in revenue and gross profit dollars is minimal. I just want to see if you could explain that and then also if you think this significant inventory build is contributing to the higher shrink accrual of 30 basis points.
Kevin Wampler:
Yes, I mean, I think when we look at our inventory at Family Dollar, as we said, we have been consistently working to improve in-stock levels, especially first of the month, being ready for that key time to service that customer. And so that's always been something. As well as the fact that, as I mentioned, several category resets going on currently, which has elevated some levels of inventory for that. So the expectation would be as we go through the year, that will come back down. And then, as I pointed out, the other point being is we were actually down a year ago at this point in time, 4.2% on a selling square-foot basis as we were going through some of the changes. So all in all, I think inventories is where we'd expect it to be. The -- as far as shrink, I mean, obviously, when you have more inventory in the stores, that can have an effect on shrink. I don't know that I would specifically say that's probably going to shrink because, obviously, the shrink results are for -- are really for stores that are being inventoried since a year ago. And the inventory levels last year tended to be lower in general. So I don't know that that's exactly a cause, but it's something that we do keep our eye on because it can be an effect in the longer term.
Gary Philbin:
Dan, I would just add my color to it. We did several measured tests in our Family Dollar Stores. And listen, our customer research at the beginning of this said our customers are disappointed with out-of-stocks. And that's a function of supply chain. Sometimes it's a function of the replenishment we put into the store. We wanted and aimed for specific categories to get [ meatier ] on the shelf. And so we're going to run year-over-year a higher inventory level. Q1 also reflects some of the items that are in place to try to minimize the out-of-stocks as we do resets, so rather than linger, get the product in the store and that's part of what's driving up inventory, too. But I think your last point is a real one. I mean, I would just tell you, if I put my operator hat on, yes, I think we've got to bring down some of the inventory levels across some of the categories, and that ought to help shrink. The thing with shrink is you have a couple of good years or 3 good years, and people -- it's not that they take their eye off the ball, but it becomes a priority further down their checklist. And we've got to get it right back underneath sales and people development at both banners, quite frankly, as the things that we monitor on a weekly, monthly basis.
Daniel Wewer:
Gary, just as a quick follow-up. Smart Ways to Save has -- plays a big focus on private label, digital coupons, better endcaps, et cetera. Do you think we're now at the point where you need to get more aggressive in pricing for branded consumables in the Family Dollar segment to help bridge that sales deficiency?
Gary Philbin:
Well, I would tell you that we had some pretty good comps across some of the national brand categories and brands for Q1 despite the overall comp being down. There's never one arrow in the quiver. I think, to me, it's -- our customers thrive and then survive at the end of the month many times, our lowest-income customer. I think we can trade her up when she has some money in her pocket. But we can't stray too far promoting opening price point, and that's really what Smart Ways to Save was to basically put an umbrella over that says, "There's a number of ways to entice this customer." You're right. We have to be right on everyday pricing, and everything that we see shows us more competitive than last year at the same time. I think the merchant team has done a nice job getting us some line on some of the right assortment. I think the private brands show our customer even greater savings. And our Smart Ways to Save is giving us some market intelligence to our customer when she buys one from first of the month to the end of the month. So it's an umbrella for how we're going to go after this whole approach, knowing our customer better, buying brands, enticing with private label. And $1 Wow is going to be part of our DNA. Obviously, it's been at Family Dollar, we can certainly help it with our Dollar Tree business.
Operator:
Our next question comes from Paul Trussell with Deutsche Bank.
Paul Trussell:
I'm just going to circle back to the top line questions asked and try to approach it just slightly differently. Gary, what do you calculate the impact of weather to the 1Q comp to be for the Family Dollar and Dollar Tree banners? And are you suggesting that the headwind to Family Dollar was significantly greater than Dollar Tree? And then just to confirm, the Family Dollar comps, are they positive quarter-to-date? I think that's what you mentioned. And just want to know how you're thinking about at Deals and Dollar Tree's top line over the balance of the year. And I guess, at the crux of that last part of the question is, has your outlook on the health or the spending power of your core customer changed at all?
Gary Philbin:
Yes, comps are positive as we go throughout the quarter; let me start with that. And the weather does impact Family Dollar more around those 2 big categories I mentioned. I mean, Dollar Tree doesn't have an apparel department, really. It's a bigger category, obviously, at Family Dollar. And lawn and garden at Family Dollar is everything that we sell in charcoal and grills and what people buy when the weather gets nice. We have a different market, a different customer segment and we're going to have different product at Dollar Tree. I think it's, quite frankly, remarkable that Dollar Tree team, merchants, operators, field teams -- I mean, a 4 comp with an early Easter and knowing what we are faced with snow on the ground in March, I mean, really, my hat's off to the team. It's one thing to plan it, but the team executed that, and I was really pleased. And Family Dollar, for all those reasons, part of it being our customer. If you don't have a car, your bus line gets disrupted, you're shopping differently. So I would say that's the things that I'd point to for our customer. And I don't know how to think about the health of our customer. If we're -- I think our customer maybe tends to be impacted more by apartment rents, which we've seen go up more. Fuel is up, but lots of our customers are riding buses to work and to stores, obviously. And we're all still about the cars like anybody else out in that part of the world. But I'd sort of point to this customer, when she has money and we have the right offering, we've seen her respond. And that's the difference between the banners. I think -- how do we overcome that over time? I think it goes back to what we've been working on. It's being convenient. It's getting the stores renovated so there's a reason to go there. It's what's new at a Family Dollar. So besides being right on the basics, that spark that we got to have in our store on the merchandising piece, some of it's tied to the seasonal, some of it's going to be closedowns, some of it's just going to be the stuff we invest because we can when we go over to Asia and find some new products. So it's a combination of those things that will build the strength of the Family Dollar brand over time. And for Dollar Tree, I mean, I feel like our folks are on it. They have the right agenda items in front of them. We don't like where shrink is for either banner right now. But we view that as a controllable expense. We've got to get back to the basics on that and drive that out from the impact that we're seeing this year. So that's how I'm thinking about it. And like I said, we're pleased with how Q2 is starting out because the same categories that sort of kicked us in Q1, we saw it respond at the beginning of Q2 here.
Paul Trussell:
And what synergies, if any, are you still taking advantage of and see flow in through the P&L this year? And what are your updated thoughts on Family Dollar's EBIT margin potential and the timetable and the comp needed to get there?
Gary Philbin:
Well, let me tell the synergies was the kickoff around really the big buckets were identical, similar match on items; it was the rebanners, so Family Dollars to the Dollar Trees; it was going after our indirect product; and a smaller portion was around logistics, at least that we've been able to take advantage of, one DC that's now co-bannered. So as we've kicked this off and worked through that, those elements are in our P&Ls for both banners as we march forward. It doesn't mean we don't stop taking auctions together or finding opportunities to get costs down in the system. But really, we get one bite at the apple of our synergy number. And so the teams work together now to leverage vendors, to find the right vendors, to find people that need capacity to go to market on the merchandise side; same on indirect. And rebanners, while we're going to do a sprinkling of them this year, that will be more opportunistic. I think to go back to your question, we said we ought to be able to get back to historical levels. And we've got to be able to do that by driving that top line sales number. And to me, the underpinnings of that are going to be renovations, new stores. Yes, we're doing about 300 new stores a year. I think, ultimately, you want a bigger number of Family Dollar Stores coming out of the pike than that. So as we slowed it down to make the -- do the needed work we needed to on adjacencies and work, and that's part of our renovation, that's how a new Family Dollar opens up now, as that fleet changes, that will give us some stability and top line comps over time. The work that's going to go on, on the merchandising side won't stop. But it's going to be underneath the umbrella of Smart Ways to Save on the elements that we've been talking about this morning. So there's still the path there, the things that we signed up for at the beginning are still there. It's -- but to get there, we do have to invest in the facilities and the stores, our people, too, and keep driving the incredible values that we need for our customers to give them a reason to come into a Family Dollar at the beginning of the month and the end of the month.
Operator:
Our next question comes from Scot Ciccarelli with RBC Capital Markets.
Scot Ciccarelli:
Scot Ciccarelli. I guess, this is a little bit of a follow-on to Paul's question. According to your proxy, you guys have already exceeded your synergy targets. And so I guess, if I could -- if you could provide just a little bit more color, Gary, in terms of what you're talking about, are there still more costs to extract with Family Dollar with the way you guys kind of thought about synergies? Or is it -- as you started to -- I think started to imply, you really need to generate sales growth and natural leverage to drive significant bottom line improvements to Family Dollar. Just what's the right way to think about it, costs coming out? Or is it kind of natural leverage and we've got to get the top line to generate that?
Kevin Wampler:
Well, Scot, I think, as we think about it, it starts -- it always starts with driving top line, for sure. But we always have been a very cost-conscious business. And to your point on the synergy, we stated from day 1 the expectation of achieving $300 million of run rate synergies at the end of 3 years. To your point, in the proxy, we did note that it's been certified that we had a long-term performance plan related to $450 million that have been achieved. As part of that, we reinvested some of those dollars, as we went along as well, to improve the business and move it forward as you would think we would. We had some significant success in the areas of indirect spend, cost of goods sold and banner optimization exceeding our targets in those areas. And so that was very good. But so now we're really about 30 days away from hitting that 3-year mark, and we're really transitioning from what we would call synergy initiatives to really what we would really call our normal process as it relates to cost savings and process improvement that have been a long part of our performance-based culture here at Dollar Tree. So I think those types of things, to Gary's point, will continue. We'll continue to work on various processes and cost initiatives. We're not just going to speak to synergies anymore. That's kind of run its course at this point in time. And -- but to your point, those things will continue. It's very important to us. But we do really need to drive top line to get where we'd like to get from -- in the long term with our margin.
Operator:
Our next question comes from John Heinbockel with Guggenheim.
John Heinbockel:
So Gary, 2 things, maybe related or probably not. If you think about -- how would you assess store conditions at Family Dollar today? Obviously, in-stock is most important, but just overall shopability. How do you assess that? Where do you think, with the investments you're making in labor, how much improvement do you think you can achieve here as we head out maybe into 2019? And then secondarily, the shrink at Dollar Tree, where is that coming from, be it product category or process or bucket? And I guess that would be with us for a while, right, until you do more physicals.
Gary Philbin:
Well, let me start with the store conditions at Family Dollar. They've improved, and I would give our store teams and field teams credit. Are we fragile? Are we perfect? No, we still have a ways to go. And it's a little -- we run our stores with sometimes minimum coverage. And so a truck gets late or the bus shows up with customers, we could be at risk. But I think the fundamentals that we're building around how do we think about building a schedule, the work to be done, and it sort of speaks to your second question then, where do you invest in a Family Dollar on the labor side? This isn't rocket science. It's about getting our stores stocked. It's getting them phased out and recovered and it's taking care of customers, primarily. And it's -- how do we drive each of those buckets to the maximum efficiency. So on our investment, we're not trying to peanut butter every store everywhere. We're really trying to invest in the stores that we see upside because of sales trends, our opportunity to invest in labor, specifically around those categories, to drive the difference. Now beyond that, the facilities along the way, we made an investment, too
Operator:
We have time for one more question from Chuck Grom with Gordon Haskett.
Charles Grom:
Just a couple of questions here on the guidance, Kevin, kind of following up on Paul's earlier. Just want to see if you guys are still comfortable with positive comps in the remainder of the year across both banners. And then on the gross margin line, I think, back in March, you said down 20 to 30 basis points. Wonder if you could update that line item for us.
Kevin Wampler:
Yes, I think, obviously, as we give guidance on an enterprise basis as it relates our comps that we set, low single-digit comps, so we're obviously comfortable with that. As it relates to gross margin, I think there probably is a little more pressure than what we had initially said. Obviously, the -- with the fact that shrink as well as freight are obviously up in the gross margin category and given what we've seen there, what we've talked about today, there'll be a little bit more pressure within that line item going forward.
Charles Grom:
Okay. And just on the weather issue -- sorry, another crack at it. A number of retailers have sort of backed that out or tried to back it out. Just wondering if the first quarter seasonal business, apparel business had trended similar to what you're seeing today, any sense for what Family Dollar would have comped in the first quarter.
Gary Philbin:
Well, I don't know. It's a game of what-ifs. But I know it's a big enough impact on Q1 that it was -- it's part of why we had a negative comp. I mean, that and lawn and garden, I can almost put a fence around and say, "Those were the issues." So -- and I think, when it gets warm, it pops, as it should. And I think that's -- it tells me we got some of the right things out in store and our customer is responding because she does need them now, short sleeves and shorts too. I went back to some of our weeks when -- in March, your -- some of your better categories are long-sleeved hoodies and tops, that's not a good thing for April. So I think we saw that switch now as we got into May and with the traditional shopping patterns.
Charles Grom:
Okay. And then just one last one, just bigger picture. Obviously, before you acquired Family Dollar, there was a number of issues, some of which were price, some of it was execution and then a lot of people thought it was real estate. You've done a really good job on price. I think table stake initiatives, based on our checks, look great, which kind of leaves real estate as the problem. I'm wondering -- I don't want to look at first quarter and run with it too far. But do you think there's a real estate problem with the FDO segment? And if so, how do you address that and the time line to address it?
Gary Philbin:
I wouldn't say a problem. I think the opportunity that we saw going in was there's a number of different store formats out there that don't give the right square footage at the right department, which is what part of their renovation program does. And over time, it's a fleet of stores that some stores come up every year on lease renewals. So while it's a bit about the pieces are on the chessboard, over time, we can take advantage of where we think we ought to be and perform the best. But I would say, I don't know how to put a proportion to it. Probably it's going to be getting the opportunity to put stores where we want them with the new-store program. They'll be closing down stores that aren't performing for whatever reason. But I think the more exciting part of the business and the reason we did this was an opportunity to drive renovations in the new stores where we want. That's the top side and really where we see the opportunity for Family Dollar. So all those other things you talked about, yes. Get the pricing right, get the execution better in store, let's invest in the stores. Over time, those are the things in retail that tend to come back and drive store performance. So we're not taking our sights off those important elements as we go forward.
Operator:
I would now like to turn the conference over to Mr. Randy Guiler for closing remarks.
Randy Guiler:
Thank you, Jonathan, and thank you for joining us for today's call, especially for your continued interest in Dollar Tree. Our next quarterly earnings conference call to discuss Q2 results is scheduled for Thursday, August 30, 2018. Have a good day.
Operator:
Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
Operator:
Good day, and welcome to the Dollar Tree, Inc. Fourth 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.
Randy Guiler:
Thank you. Good morning, and welcome to our call to discuss Dollar Tree's performance for the 14-week fourth quarter and for the 53-week fiscal year 2017. On today's call with me will be CEO, Gary Philbin; and CFO, Kevin Wampler.
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 today's press release, most recent 8-K, 10-Q and 10-K, which are all on file with the SEC. We have no obligation to update our forward-looking statements, and you should not expect us to do so. At the end of our prepared remarks, we will open the call to your questions. [Operator Instructions] Now I'll turn the call over to Gary Philbin, Dollar Tree's Enterprise President and Chief Executive Officer.
Gary Philbin:
Thanks, Randy, and good morning, everyone. This morning, we announced our results for our 14-week fourth quarter of fiscal 2017. Sales increased 12.9% to $6.36 billion. Our consolidated same-store sales increased 2.4%.
By segment, comp sales for the Dollar Tree banner increased 3.8%. For the Family Dollar banner, comp sales increased 1%. This represented our 40th consecutive quarter of positive same-store sales for Dollar Tree banner, and that's every quarter for the past 10 years. And it also represented our third straight quarter of positive comps at Family Dollar as we continue to make progress on rebuilding the business. Our enterprise gross margin rate improved 90 basis points to 33.0%; operating income increased 30.5% to $765.6 million; and our operating margin rate improved 160 basis points to 12%. GAAP earnings per share increased 221.3% to $4.37. There were multiple discrete items during the quarter, including the impact of tax reform, which Kevin will share more detail on in his prepared remarks. Our adjusted EPS was $1.89, a 39% improvement from prior year's quarter and at the top end of our $1.80 to $1.89 range of guidance. I'm proud of our team's performance in the fourth quarter and our results for 2017. We have a dedicated team of associates across each of our business segments that drive our customer engagement and deliver the following results. For Dollar Tree, the banner delivered a solid 3.8 comp along with a 50 basis point improvement in its sector-leading operating margin. The Family Dollar banner delivered its third consecutive quarter of positive same-store sales along with a 6.8% operating margin, a 280 basis point improvement from Q4 last year. Our Dollar Tree Canada team delivered another solid quarter of strong sales coupled with improved margins and leveraged expenses. And our Dollar Tree drink business delivered double-digit comp sales in both sales and visits to our websites. In our Dollar Tree banner for the fourth quarter, our top-performing categories were our Christmas assortment, which had just a terrific holiday season; candy; snacks; beverage; household consumables; beauty and eyewear. Our sales performance was very balanced with discretionary slightly outperforming consumables, both of them comped up more than 3%. All 3 months comped positively with November being the strongest month. And geographically, Dollar Tree same-store sales growth was strongest in the Southwest, West and Midwest. And all of our zones delivered positive comps greater than 2%. Customers continue to be thrilled with Dollar Tree's unique fixed price point concept and the business continues to be strong, consistent and growing. As I've mentioned, this is the 40th consecutive quarter of positive same-store sales and our operating margin of nearly 17% for the quarter continues to lead the value sector. Our fourth quarter performance again validates the strength of the Dollar Tree brand. Customers love the value and convenience of shopping at Dollar Tree. We are very pleased with the traffic and sales results, our merchandising assortment and the flow of inventory. Our business model continues to focus on our customers' wants and needs, and our shopping experience is unique. Customers find it compelling as we get compared to other retailers. In our Family Dollar banner for the fourth quarter, our top-performing categories included our refrigerated and frozen food sections, school and office supplies and bedding. Our comp performance was again driven by consumables, and comp sales cadence through the quarter was positive each month, November and January being the strongest months. Geographically, Family Dollar same-store sales growth for the quarter was strongest in our West, Mid-Atlantic, Mountain West and Southwest zones. And importantly, all 8 of our major geographic zones delivered positive comps. Since the acquisition, much of our focus at Family Dollar has been around our table stakes initiatives to improve store standards. Feedback continues to come from our shoppers that indicate they are seeing cleaner stores, greater values on the items our customers buy most often, improved product assortments, more consistent in-stocks and better customer service in our stores. The combination of value and convenience is the foundation for the Family Dollar business. Our stores are the place to stop for basic fill needs for our customers' shopping list. The nearly 8,200 Family Dollar Stores across 46 states are conveniently located in markets and neighborhoods where many of our primary customers live, work and shop. Our stores are easy to shop and provide terrific values in every aisle. We deliver our value message to our customers through our Smart Ways to Save program, and whether you visit a Family Dollar store, view a marketing circular or check in our website, you'll see the consistent value messaging. The Smart Ways to Save includes our EDLP pricing for everyday value; price drops that reflect meaningful value on promotional items throughout the store; our $1 Wow, which drives surprise and value and an opening price point in our stores; and Compare and Save, which calls on great values on our private brands. And supporting our Smart Ways to Save is our Smart Coupon program, which was launched chain-wide on Labor Day of 2016. And after just 18 months, we have more than 5.3 million customers who have opted-in to receive Smart Coupons. Our recently introduced Family Dollar mobile app makes it easier for customers to use Smart Coupons. We've seen more than 2 million customers download the app, and we're receiving strong reviews on both Android and iOS systems. Visit to the web and app have doubled from the prior year. I'm very pleased with the progress on upgrading our private brand assortment in the stores. These private brands are being developed to provide national brand comparable quality and terrific values to support the Compare and Save component of our Smart Ways to Save program. Our customers know they can count on the quality with our 100% customer satisfaction guarantee. Examples of changes we've already made in our consumables aisles include the Family Gourmet brand that's been replaced with such brands as Catawba Candy Company, eats and salty snacks and cookies; and Chestnut Hill and grocery prepared and some refrigerated frozen food items. The Family Dollar brand has been retired in household products such as laundry, cleaning and paper and replaced with our new HOMELINE brand. We've introduced 2 new brands to auto and hardware, Driver's Choice and Tool Bench. And within our health and beauty assortment, we've redesigned our look for Family Wellness, [indiscernible], and [ kitchen ] brands. We've also added some new brands such as Nature's Measure in vitamins; Daxton in men's personal care. In 2018, the next phase of our private brand initiative will focus on discretionary brands in home, housewares and general merchandise. During the fourth quarter, we completed another 75 Family Dollar store renovations, bringing our 27 total to 377. We continue to be very pleased with the initial results we are seeing in these newly renovated stores and especially about the feedback we're receiving from our customers and store teams. Elements of the improved store layout include better shopping adjacencies and more productive endcaps, expanded beverage and snack, including immediate consumption coolers near the checkout; added assortment of food in coolers and freezers; updated haircare assortment; expanded adult beverage in select stores; our shopper-friendly power alley to promote $1 Wow items, and a faster checkout for our customers. Besides the renovation stores, all of our store teams are working hard to be the neighborhood store of choice for the fill-in shopping needs of our Family Dollar customers that typically live, work and shop near our stores. For Canada, our highlights include our focus on running great stores. Our merchants continue to source exceptional values and product. Our operators are delivering on brand standards in our stores. The discretionary side in particular of our Canadian business continue to perform well. Our top-performing categories include HBC, candy, toys, and crafts. We continue to be focused on our goal to be recognized as a leading single price point retailer in Canada at CAD 1.25, just as we are $1 in the U.S. We currently operate 225 stores in Canada, continue to see the opportunity for our 1,000 store vision of stores over all the Canadian provinces over time. At Dollar Tree Direct, our web presence and selling site for the Dollar Tree banner provides an opportunity to enhance our customer base, drive incremental sales, extend brand awareness and encourage store visits. It was another productive and profitable quarter for Dollar Tree Direct as we experienced double-digit increases in sales and site traffic. More than half of our traffic to dollartree.com was from mobile devices and our online videos earned more than 2.4 million views during the quarter, highlighted by our new product videos associated with our million dollar brands. In December, we launched our first ever Tacky Sweater contest which promote our holiday decorations and wearables, of course, at the incredible price of $1. And January, we distributed our 2018 Spring catalog directly to key customers and to all of our Dollar Tree stores touting our spring, dinnerware, Easter, spring cleaning and lawn and garden products. Our customers can now find great values, new items and seasonal excitement at dollartree.com and familydollar.com and even more offers just for them with the new Family Dollar app. Now turning to real estate in the fourth quarter. We opened up a total of 137 new stores, 51 Dollar Trees and 86 Family Dollar. We relocated or expanded 8 stores or Dollar Trees for Family Dollars. We renovated 75 Family Dollar Stores as part of the renovation initiative for a total of 220 projects during the quarter. We also added freezers and coolers into 77 Dollar Tree stores during the fourth quarter, now bringing our total to 5,207 of Dollar Tree stores with freezers and coolers. During the quarter, we closed 46 stores, 5 Dollar Trees, 41 Family Dollars, and we ended the year with 14,835 stores, 6,650 Dollar Trees, 8,185 Family Dollar. For 2018, our real estate plans include 650 new stores, 350 Dollar Tree and 300 Family Dollar. Renovations of at least 450 Family Dollar stores; relocations or expansions of approximately 100 stores, and approximately 50 rebanners from Family Dollar to Dollar Tree. Cooler and freezer expansions in 500 Family Dollar Stores and the addition of adult beverage to 700 Family Dollar stores. And adding freezers and coolers to 500 new and existing Dollar Tree stores. We are pleased with our results and enthusiastic about the opportunities ahead of us. I'll now turn the call over to Kevin to provide more detail on our fourth quarter performance and our initial outlook for Q1 and fiscal 2018. Kevin?
Kevin Wampler:
Thanks, Gary, and good morning. Sales and earnings were favorably impacted by the addition of a 14th week in the fourth quarter consistent with the 53-week retail calendar. The extra week contributed $406.6 million of sales and approximately $0.21 to earnings per share.
Total sales for the fourth quarter grew 12.9% to $6.36 billion within our guidance range of $6.32 billion to $6.43 billion. Dollar Tree segment total sales increased 14.5% to $3.32 billion, and Family Dollar segment total sales increased 11.1% to $3.04 billion. Enterprise same-store sales increased 2.4% on a constant currency basis or 2.5% when adjusted for Canadian currency fluctuations. On a segment basis, same-store sales for the Dollar Tree banner increased 3.8% or 3.9% when adjusted for currency fluctuations, and the Family Dollar banner increased 1%. Gross profit for the combined organization increased 16.3% to $2.1 billion for the fourth quarter of 2017 compared to the prior year's quarter. The increment -- as a percent of sales, gross profit margin improved 90 basis points to 33% versus 32.1% in the prior year's quarter. Gross profit margin for the Dollar Tree segment was 38% for the fourth quarter, a 50 basis point improvement compared with the prior year's fourth quarter. Factors impacting the segment's gross margin performance during the quarter included lower occupancy costs as a percent of sales due to the leverage from the extra week of sales and comp sales gain and lower shrink and markdowns compared to the prior year's quarter. These are partially offset by higher freight costs. Gross profit margin for Family Dollar segment was 27.6% during the fourth quarter compared with 26.3% in the comparable prior year period. The 130 basis point improvement was primarily due to lower markdown expense as a result of a continued focus on improving our promotional and clearance markdown strategies and lower occupancy costs as a percent of sales, primarily due to the extra week. Consolidated selling, general and administrative expenses, as a percentage of net sales in the quarter, improved 70 basis points to 21% from 21.7% in the same quarter last year. This includes a $35 million recovery from Sycamore Partners related to our Dollar Express settlement and includes $12.6 million of expense related to a change in recording our Dollar Tree workers' compensation reserves on an undiscounted basis. Excluding the 2 items noted, SG&A as a percent of sales, improved 40 basis points for the quarter. Fourth quarter SG&A expense for the Dollar Tree segment as a percentage of sales, was consistent to the prior year at 21.1%. Excluding the $12.6 million of expense related to workers' compensation noted previously, SG&A improved to 20.8% of sales. The improvement was driven by lower depreciation and leverage from the sales from the 14th week, partially offset by higher store payroll costs. SG&A expense for the Family Dollar segment, as a percentage of sales, was 20.8% compared to 22.3% in the prior year's quarter. The 150 basis point improvement was a result of 120 basis point positive impact from the $35 million receivable impairment recovery; lower repair and maintenance cost; and lower depreciation cost, partially offset by higher incentive compensation and our retirement plan contributions and increased advertising costs. Operating income for the enterprise increased to $765.6 million compared with $586.5 million in the same period last year. Operating income margin improved 160 basis points to 12% for the quarter from 10.4% from last year's fourth quarter. Excluding the previously mentioned net benefit of $22.4 million, adjusted operating margin was 11.7%. Operating income margin for the Dollar Tree segment grew 50 basis points to 16.9% when compared to the prior year quarter. Operating income for the Family Dollar segment increased $95.2 million to $205.6 million, a 280 basis point improvement, as a percentage of sales, when compared to the prior year's quarter. Excluding the Dollar Express receivable impairment recovery, operating income increased 160 basis points to 5.6%. Nonoperating expenses for the quarter totaled $74.1 million, which was comprised primarily of net interest expense of $81.6 million, partially offset by $7.5 million of income for recognition of the completion of all requirements for the forgivable promissory note issued by the State of Connecticut for the construction of our Windsor, Connecticut distribution center in 2012. Our effective tax rate for the quarter was a benefit of 50.4% compared to an expense of 35.3% in the prior year period. The current year benefit is a result of the Tax Cut and Jobs Act, which lowered the federal corporate tax rate from 35% to 21% and made numerous other law changes as of January 1, 2018. Our fiscal 2017 included 34 calendar days in calendar year 2018. Therefore, the overall 2017 statutory rate for the year was 33.7%. The effective tax rate also included a $562 million noncash benefit, resulting from the remeasurement of our net deferred tax liability to reflect the lower statutory rate. The total benefit from the Tax Cuts and Jobs Act to the fourth quarter was $583.7 million. For the fourth quarter, the company had net income of $1.04 billion or $4.37 per diluted share compared to the reported net income of $321.8 million or $1.36 per diluted share in the prior year's quarter. Last year's Q4 reported earnings of $1.36 per share, included $0.03 of expense for the write-off of amortizable noncash deferred financing costs incurred during Q4 of 2016. The company estimates that the 53rd week in fiscal 2017 represented a benefit of approximately $0.21 per diluted share. Adjusted EPS for the quarter was $1.89. Today's press release includes a reconciliation of non-GAAP financial measures for the details on the adjustments. Looking at the balance sheet. Combined cash and cash equivalents at year-end totaled $1.1 billion compared to $866.4 million at the end of fiscal 2016. Our outstanding debt as of February 3, 2018 was approximately $5.7 billion, a decrease of $644 million from the prior year-end. On March 1, 2018, the company prepaid its $750 million of 2020 notes. The prepayment included a redemption premium of $9.8 million, which was included in interest expense in the fourth quarter. Inventory for the Dollar Tree segment at quarter end increased 12.1% from the same time last year while selling square footage increased 4.8%. Inventory for selling square foot increased 7%. We believe the current inventory levels are appropriate to support the earlier Easter selling season, scheduled new store openings and our sales initiatives for the first quarter. Inventory for the Family Dollar segment at quarter end increased 9.4% from the same period last year and increased 6.5% on a selling square foot basis. We're pleased with the progress we're seeing on in-stock levels on key items. We're continuing to review merchandise assortments and believe our current inventory levels are appropriate for the first quarter. Capital expenditures were $182.8 million in the fourth quarter of 2017 versus $113.2 million in the fourth quarter of last year. For fiscal 2018, we are planning for consolidated capital expenditures to range from $875 million to $890 million. Capital expenditures will be focused on 650 new stores, 100 remodels, along with the renovation of 450 Family Dollar stores. The addition of frozen or refrigerated capability to a total of 500 new and existing Dollar Tree stores; the expansion of frozen and refrigerated capability to 500 Family Dollar Stores; and the addition of adult beverage to 700 stores; IT system enhancements and integration projects; installation of LED lighting in approximately 3,000 stores; the completion of construction of a new Dollar Tree banner distribution center in Warrensburg, Missouri, as well as the start of construction on Dollar Tree DC 15 and additional automation projects, and the completion of our Chesapeake store support center expansion. Depreciation and amortization totaled $156.6 million for the fourth quarter. Depreciation and amortization expense was $155.5 million in the fourth quarter last year. For fiscal 2018, we expect consolidated depreciation and amortization to range from $610 million to $620 million. This includes $59 million for fiscal 2018 for the amortization of favorable lease rights for the purchase accounting valuation of Family Dollar leases compared to $69 million in the prior year. The company benefited in the fourth quarter and fiscal 2017 with respect to the Tax Cuts and Jobs Act. We expect to continue to benefit going forward and estimate the benefit to be approximately $250 million for fiscal 2018.
We plan to invest approximately $100 million as follows:
invest in our stores with more hours in stores, including training for associates; invest in our people with increased average hourly rates; add our Family Dollar eligible associates to the defined contribution plans starting in fiscal 2017 and increase contributions in fiscal 2018; and establish paid maternity leave for eligible associates. The $100 million investment in the business is included in our company outlook.
Before I speak to our assumptions included in our 2018 outlook, I wanted to outline adjusted earnings results for fiscal 2017. As shown in the reconciliation of non-GAAP financial measures in the earnings release, adjusted EPS for the year was $4.86. Additionally, in 2017, we benefited from the following:
$0.21 per share for the 53rd week; a $0.04 benefit per share for a Q2 tax item; and $0.02 per share in Q4 related to the Windsor, Connecticut DC forgivable promissory note. This resulted in adjusted EPS for fiscal 2017 of $4.59.
Our initial outlook for fiscal 2018 includes the following assumptions:
calendar considerations for the year include the following
We expect continued pressure on store payroll based on state's increasing minimum wages and general average hourly rate increases. We have budgeted higher freight costs and diesel costs than a year ago. Our outlook currently includes a headwind of approximately $68 million or $0.22 in earnings per share related to these costs. We will continue to work with our transportation partners to mitigate these increases as we go forward. Net interest expense will be approximately $70 million in Q1 and $60 million for Q2 through Q4. Included in Q1 interest expense is approximately $6.1 million or $0.02 per diluted share for the acceleration of noncash deferred financing costs related to the redemption of the 2020 Notes, which I spoke to earlier. Our guidance does not include any share repurchases. We cannot predict future currency fluctuations so we have not adjusted our guidance for changes in currency rates. Again, our 2018 guidance does include the investment of $100 million into our business of the projected $250 million tax benefit. Our guidance assumes a tax rate of 23.1% for the first quarter and 22.9% for fiscal 2018. Weighted average diluted share counts are assumed to be 238.5 million shares for Q1 and 238.9 million shares for the full year. For the first quarter, we are forecasting total sales to range from $5.53 billion to $5.63 billion, and diluted earnings per share in the range of $1.18 to $1.25. These estimates are based on a low single-digit same-store sales increase and year-over-year square footage growth of 3.3%. For fiscal 2018, a 52-week year, we are forecasting total sales to range between $22.7 billion and $23.12 billion; and diluted earnings per share in the range of $5.25 to $5.60. These estimates are based on a low single-digit same-store sales increase and 3.7% square footage growth. With that, I'll turn the call back over to Gary.
Gary Philbin:
Thank you, Kevin. Again, I'm pleased with our performance for the fourth quarter and throughout 2017. I'm extremely proud of our combined Family Dollar and Dollar Tree teams. We continue to make meaningful progress to grow and improve our business. We're well-positioned in the most attractive sector of retail to deliver continued growth and increase value for our long-term shareholders.
Our company is now a diversified combination of 6,600 single price point Dollar Trees and 8,100 neighborhood Family Dollar stores, each with its unique ability to effectively serve more customers through all types of markets. This combination of 2 great brands provides great flexibility in managing our growth. I would like to describe our investment in the business that Kevin detailed by line item in his comments. Our view is to take a portion of the tax savings to invest in the business while the majority of the savings will drop to our bottom line earnings and positively drive earnings per share. This is a unique opportunity to invest where our customers will see the greatest impact when they shop at Family Dollar or Dollar Tree store. We're going to invest in our people. I believe hiring more associates at store level, driving more hours into our stores, will create a better shopping experience. As you've heard us describe before, a direct link to our store managers who can best drive the business for their stores and be rewarded with higher bonuses. We will approach this with the same discipline to invest in the right seasons and weeks of the month like we would do any other project and we'll measure it as we put the hours into specific stores. Also, training for associates at store level, primarily for our store managers that have such great influence on their teams and our success, our best store managers, almost without exception, are run by our veteran store teams led by great store managers. Investing in rates of pay. The current levels of unemployment in some geographies have put pressure on wages. Both at our distribution centers and stores, we believe we can find the right levels to keep and attract the best people to drive our success. The productivity that our experienced associates drive into our business delivers a bottom line result that we've been proud to report. Investing in associate benefits, smaller in scale, but just as important, call us to establishing a maternity leave program with details to be soon announced to our full-time associates. And including our Family Dollar team members in our profit-sharing program. Investing in our families that provides service to their families and their neighborhoods, will make Dollar Tree, Family Dollar the employer of choice in the communities we serve. Our profit-sharing program contributes to our full-time associates and directly links our company goals to drive shareholder value to the teams that drive customer engagement. We will also be investing in certain Family Dollar store stores that need to be brought up to brand standard. We're investing in these specific areas of our business because we believe they will drive our business and create a better opportunity for our stores to perform across a spectrum of customer engagement scores that reflect our brand standard. I'm counting on our teams to be able to drive a better shopping experience and more sales. Finally, I recently joined our global sourcing teams on their important post holiday overseas buying trip, it was with both Dollar Tree and Family Dollar merchants, and a successful trip, and we met our planned margin goals. Our teams continue to effectively develop our direct to factory partnerships, shop the market and procure great values and improve our supply chain and quality control standards. Dollar Tree is well recognized and well respected overseas as a successful growth retailer. Our company has developed experience and expertise in sourcing, and we are leveraging these assets across all banners. The retail environment ever-changing provides both banners' opportunities to take advantage of our customers' wants and needs. Our management team has demonstrated over the years the ability to be nimble and deliver results when challenged by the external environment. Our initiatives of both banners have helped to deliver on sales, margins, expense control and ultimately, customer satisfaction. We're proud of the progress we have made and enthusiastic about the opportunities ahead of us. Operator, we're now ready for questions.
Operator:
[Operator Instructions] We'll go first to Rob Ohmes of Bank of America Merrill Lynch.
Robert Ohmes:
Gary, I actually was hoping you could talk about what you're seeing in the momentum of your customer? Has there been any slowdown or -- maybe work into that, maybe momentum with your customer thinking about gas prices being up a bit versus last year. Maybe whether you are or aren't seeing any kind of trade up in some of your categories. And then maybe even some color on -- in the markets where labor is tighter and wages are going up, do you see differences in your same-store sales versus markets where that isn't happening?
Gary Philbin:
Thanks, Robbie. If I were to take a look at Q4, you saw some of the categories. On the Dollar Tree side, our seasons -- and punctuated really by the Christmas season, the biggest holiday we have, was just terrific. Credit to the assortment, the excitement in stores, it showed up with great sell-through and we could not have been more pleased with the seasons. And we sort of have always laid down that -- the hurdle we want to jump every year, as every season we come to, we want to jump over it. And certainly, the team did that in the fourth quarter. And for Dollar Tree, it continued into really to Valentine's, a little bit of a smaller holiday, but just a great impact there. And so I would say our -- the mix that you saw in the fourth quarter, consumables and discretionary, saw a better race for each other that we're comping great, so that mix has continued into the beginning of this year. So we're going to overcome, work our tail off on early Easter with winter storms still hitting both coasts. Not thrilled with what March does to an Easter holiday. But I think on the Dollar Tree business, we see the same kind of momentum. At Family Dollar, we did a lot of re-dos this year. We -- if you went into our Family Dollar store, you saw more brands around toys and some of our reinvention of what our customers saw there. And the customer responded favorably. So some of that was a trade up. So we continue to refine our business around the holiday. The consumables is driving the business at Family Dollar. As always, it's the magic of bringing in the seasons, the Wow, whatever we can do there. Now we go into the beginning of this year, we're driven a lot by the tax credits that our customers get. They backed up another few days this year. And so we're really at the beginning of that. So we'll see how our customer responds through March with a few more dollars in her pocket as we go through March. As far as wage pressure, it's hard for us to see a difference in comps. I would say it's more driven by, if we deliver great value in our stores, no matter what neighborhood, we tend to get a lift in that community and that store. So our investment in our people, that I outlined, really, I think, speaks to our opportunity to continue to drive our business by having folks well trained, staff in store, drive the shopping experience. And for both banners, I think when we put those links together, we end up in a good place.
Robert Ohmes:
And just on gas prices, have you seen any changes in momentum related to the higher pump prices year-over-year?
Gary Philbin:
Well, it certainly puts pressure on our lower end customer. It's gas prices, rents are up in most markets. You always -- you're never tickled when you know that your customers are under pressure on those things. But I can't tell you that it's affecting us in terms of basket because we've seen that tend to grow at both banners. Family Dollar traffic, a little flatter than Dollar Tree. So we're still split between an urban customer that probably is more walk-in and more mass transit versus rural that does have to get into a car. So I would say it's hard to define what we're seeing on gas prices affect the customer right now. I do know this, it's a few more bucks out of their pocket. It's a few more bucks out of their pocket on rent. So we're very focused on the values up and down the store shelves.
Operator:
We'll go next to John Heinbockel of Guggenheim Securities.
John Heinbockel:
These are 2 related questions. Number one, if you think about the reinvestment of the tax benefit is clearly the right thing to do. Can you get your arms around an ROI on the $100 million, particularly why are a lot of retailers adding hours, adding -- raising wage rates? Or it's just something that you know it's the right thing to do directionally, but really can't tell what the benefit is relative to your competition. And then, secondly, if you think about those investments and what's happening with freight, has your view on the trajectory of the Family Dollar margin turnaround changed? Does it get kind of pushed out a little bit because of those pressures?
Gary Philbin:
Thanks, John. I think on the first piece, I think you're spot on. I mean, you've heard all that CapEx initiatives, and we're very disciplined on every dollar we put out on the CapEx side, either at stores or frozen food or adult beverage. All those are measured with ROIs. Now we're going to invest in people with $100 million. And we're going to go into it with the same sort of business savvy that says, "Where do we get a $1.50 back if we invest $1?" It doesn't always work quite that way. I think our investment in our people ought to show up with better run stores, stores that are better in stock. Stores that -- around seasons, around first of the month, have what our customer needs. So some of this is a downstroke, in my mind, to help us get our stores on a trajectory. And while everybody is doing some of this, we are in the value sector that I think we have the best chance to have our customer respond more quickly to it. So we're going to measure it. It's going to be targeted by -- just as I said, it's going to be sometimes down to the weeks of the month around key holidays. It's going to be targeted to specific stores that we think we can drive additional business in. So we're going to track it. It's just maybe not as clean as we track our capital projects as we go through the year. The freight side is a real thing right now and it's a component really of some of the driver shortages that we'll see how long that lasts and where we are on diesel fuel. Diesel fuel is sort of back to the future, 2015, we're almost starting to the same price per gallon. It leveled out. We'll see what happens this year. I'd like to think maybe there's some relief in the back half of the year. The driver piece is a little more complicated for all of our third-party partners. They've got to find enough folks to service. We certainly have commitments who'll follow them. I think we're a great customer to have. We can put a lot of folks to work in that arena and we serve a known quantity. And we're growing. And I think the growth that we can give folks as they pitch their wagon to our engine is at least a place for us to build a future that allows us to leverage that. But near term, we're going to have to overcome this freight piece. So we're looking and asking our logistics team inside, part of it's transportation, how do we make DCs more productive? I mean, when we hit these bumps in the road from an external force on the outside, it's all hands on deck. And so we've given you our best forecast on what we know baked-in, and now we're going to work our tails off to overcome it.
Operator:
[Operator Instructions] We'll go next to Matthew Boss of JPMorgan.
Matthew Boss:
So at Family Dollar, gross profit dollar's up 16%, best performance in really recent history. I guess, how should we think about the progression of comps versus gross margin going forward? Is what we've seen so far low single-digit comps and outsized gross margin the last couple of quarters, is that in line with your strategy to date? And I guess, more so what I'm asking is, how should we think about the sales per square foot opportunity from here at Family Dollar?
Gary Philbin:
Thank you, Matt. No, listen, I'll start off by saying, we can always do better. And one comp for the quarter at Family Dollar, quite frankly, we went in with plans that we would do more. But I sort of back up and say, what are the things that are going to drive comp for the Family Dollar business, it comes down to the merchandise. So everything you've heard us talk about on the marketing and merchandising plans is getting back to the EDLP. Winning back customers that have confidence in us on pricing. Private brands, more import, you've heard us talk about those things. It's all under our Smart Ways to Save. The other piece that's a slower burn is we've got to change some of the stores that the customers see. So it's really a 2-prong attack. One piece is let's get new stores out there. So this year there's another 300 new stores that will be next-generation stores. The renovations, we are pleased with last year, we accelerated. We'll do more this year. And I think over time, that's what's going to change both the productivity on sales per square foot and continue to help the margin mix and enhancement as we get the stores that start to sell a better mix of product. So it's a combination of what we can do tactically on merchandise, marketing, touching our customers. Strategically, it's also about how we have to get the right store format across our network, across 8,200 stores, and many of them older than some of you on the call. And so it's going to be a time over -- that we get to change those and change neighborhood by neighborhood on our customer. I think what you see on the margin piece, we need comps. Sales solve all issues. And that's the focus of the Family Dollar merchandising team. Keep changing and work on the mix, drive cost, create value, and over time, get the excitement in the merchandising so that the need starts to change as well. That's still the vision we started off with. We haven't changed our thinking at all. It is maybe sometimes slower than we would like, I know that. But it's the combination of what we see on new store renovations, new stores. And maybe the last exclamation on sales per square foot, it's also how many stores we put into densely populated urban areas because they react distinctly different than a rural, small-town Family Dollar. And so we're working on both sides of that coin to say, "How do we drive productivity in both of them in the mix of new stores that come out on any given year?"
Matthew Boss:
Great. And then just a follow-up on the expense front. So underlying the $100 million tax reinvestment, I guess, what's the fixed cost hurdle that we should think about to leverage SG&A at both Dollar Tree and Family Dollar, both this year and going forward? Meaning, has anything changed on model flow-through or the way that you think about investments other than using some of the tax savings to reinvest this year?
Kevin Wampler:
Yes. No, I would tell you, Matt, I don't think anything has changed from a flow-through perspective. If anything, I think over time, we would continue to see flow-through improve on the Family Dollar side. Obviously, this quarter, we saw gross profit improve significantly. Our outlook basically takes into consideration it continuing to improve to some level next year. So I think the flow-through is fine. So again, as we think about our fixed costs and what it takes to leverage those, I think we're still in that -- probably that 2% to 3% range roughly. And again, it varies quarter-to-quarter, and so I always want to think of it on an overall basis. And it's -- so I would tell you, in that 2%, 3% range on a normal basis without a -- the large investment that we're making this year.
Gary Philbin:
And I would just add, maybe what's changed is the investment that we're talking about is obviously, going to affect op income with the flow-through coming down to EPS. But I really think the downstroke on improving the shopping experience is going to be the magic sauce for us as we continue to improve both banners and what the shopping experience can be for both.
Operator:
We'll go next to Karen Short of Barclays.
Karen Short:
I just wanted to clarify something in terms of backing into your EBIT margin guidance. So if I look at fiscal '17, excluding extra week, I get kind of an 8.8% EBIT. And then if I look at your guidance range for fiscal '18, excluding the $100 million investment, I kind of get 8.9% to 9.3% of a margin range. Is that kind of ballpark?
Kevin Wampler:
You're directionally correct on the 2017 year, excluding the 53rd week. We would tell you that's probably right around that 8.85% adjusted. And then excluding the $100 million, basically, yes, we would be showing improved operating margin. So that's part of the investment we've made. So that's the pressure point battle as well as the freight. But yes, the operating margin without the $100 million would be increased year-over-year.
Karen Short:
Right. And it's about 40 basis points with the $100 million?
Kevin Wampler:
Yes.
Karen Short:
And then the second question, I just want to clarify, Gary, you made a comment that out of the 250, you're investing $100 million and the rest is going to flow through. But I just wanted to clarify it, in terms of your CapEx, when I look at your CapEx dollars as a percent of sales in '17 versus your CapEx dollars as a percent of sales in '18, it does look like it's increasing by about 100 basis points. So it seems to me that a lot of that additional $150 million is actually going to CapEx. Is that not -- is that the right way to look at it?
Gary Philbin:
No, Karen, I would tell you that whether there was tax reform or not, our CapEx number did not change, basically. We did not make any changes to our decisions of how we were investing in our CapEx related to tax reform. These projects were already in -- on the planning board and in the -- in-flight stages, basically, prior to tax reform. So it did not have an impact on our decisions related to that.
Karen Short:
Okay. And then just last clarification question. Of the $100 million, you did say some of this is retroactive to '17, right, for the Family Dollar Defined Contribution Plan. Could you just give us what that dollar amount is?
Kevin Wampler:
Yes, so that's approximately $5 million, Karen.
Operator:
We'll go next to Scot Ciccarelli of RBC Capital Markets.
Scot Ciccarelli:
Obviously, lots of moving pieces with the diesel you talked about and incremental investments. But what's the right way for the investment community to think about the Family Dollar upgrade margin for 2018? Obviously, you're trying to balance these incremental investments versus what should still be synergy benefits? Can you provide any more color on that?
Kevin Wampler:
Yes, thanks, Scot. As we think about the operating margin for our Family Dollar business, as we've said, we do expect to see continued improvement in our overall product margin. We've done a good job the last half of this year controlling our markdowns in a much better way, as we go forward, we'd look to continue that. So I think that's an important aspect of it. That will help, hopefully, more than offset. And we'd actually look for our gross profit to increase in our Family Dollar banner in 2018. And then, obviously, the SG&A is under a little bit of pressure from the fact of the reinvestment. And if you look at the overall reinvestment of about $100 million, it's slanted about 60% Family Dollar, about 40% Dollar Tree. So we'd have to take that into consideration. So I think, on an overall basis, we would look at operating margin to be probably flat to up a little bit in our Family Dollar business.
Scot Ciccarelli:
And, Kevin, related to that, I mean, you guys have obviously talked about kind of synergies and that the spending against it. Any change in the trends of either of those? And are we still getting towards the end of the investment piece of that?
Kevin Wampler:
Yes, as we've spoke to synergies, again, the expectation is the achievement of the $300 million run rate by the end of 3 years, which would be July of 2018. And again, we've called out the reinvestment which was roughly $300 million and we've stated to spend more CapEx than OpEx. And -- but yes, we're on track. The -- no major changes in the cost side of that. It's pretty much winding down. We did announce an additional up to 50 rebanners again this year from Family Dollar to Dollar Tree. So there will be a little bit of CapEx there that will continue to flow through, but it's down to fairly minimal amounts.
Operator:
We'll go next to Dan Binder of Jefferies.
Daniel Binder:
It's Dan Binder. So my question was also around Family Dollar. The division has benefited tremendously on the sourcing side from the combination of Dollar Tree and global sourcing, et cetera, which has led to a fair amount of gross margin expansion. However, the comps or sales, as you know, have probably been a little bit lighter than we expected. I'm just curious, as you think about that equation going forward, do you feel like there's an opportunity to take some of that gross margin, be a bit more aggressive on the price side to help get the comp store sales tracking to a higher rate?
Gary Philbin:
Dan, this is Gary. Well, I think you're right. I mean, with the efforts we've made on the synergy side and like items, really, both merchandising teams did a great job getting us out of the blocks quickly on that piece. You referenced the import piece, which -- we've had a couple of buying cycles now. But I still view there's an opportunity there to find the right suppliers, more factory direct to help us -- it's sort of a 2-pronged effect. One, you get better cost. And secondly, you can find some really exciting product, which is part of the merchandising energy we want to keep working on for both banners and get going on the Family Dollar side. Those are the types of things that I think will help drive comps. Our price checks, we're more competitive than we were when we started this journey. And we're not going to -- if we're going to -- I can't read the future. We're not going to work in a vacuum. I think as we see the environment right now, certainly, it's not the same noise that we heard at the beginning of the year as we saw lots of activity mainly on the grocery side. And I think for our side, the values that we want to present to our customer, what she buys most often in a Family Dollar are the items that we want to be right on, both on the shelf and then on promotional. So it's partially when do we invest in that on the add to give it -- a customer savings above and beyond with a price drop, part of it's what's on the shelf and part of it is also what she gets on her app now. Because with 5 million folks signed up, it's that customer information that I think, over the long run, gives us another arrow in our quiver on giving our customers exactly what they need on the purchase cycles they're on. So we're going to go into this year, we have a great marketing plan. We have our thoughts around how we want to reflect pricing, both every day on shelf and what gets put into the cycles, with both our partners on the vendor side, along with what we want to drive on private brands and imports. So it's a long way of saying, we're going to drive our business really by segment of the market in a way that we think is appropriate. And we've got more than one way of doing that as we go into '18.
Daniel Binder:
And then also, could you just clarify what the $7.5 million in other income was?
Kevin Wampler:
Yes. Again, as we noted in our comments, we had a forgivable promissory note related to the State of Connecticut that once certain things were met, it became forgivable. So that has been on our books as a debt instrument, basically. And it was forgiven, so it comes through other income, basically -- nonoperating income.
Operator:
We'll take our final question from Chuck Grom of Gordon Haskett.
Charles Grom:
Just trying to connect the dots here on your guidance. So if I include the $100 million of investments and the $68 million in freight and diesel, it looks like operating margins are going to be down 40 basis points. And I guess my question is, if Family Dollar's expected to be flat year-over-year, how do we back into that down 40 for the total company? And then, Kevin, if you also could just address how you see gross margins playing out in 2018 relative to SG&A? It sounds like gross are going to be relatively stable. But I just wanted to see if you can provide some color on that.
Kevin Wampler:
I think looking at the operating margin overall for the year, I think at the midpoint, you may be down 40 basis points at the upper end. I don't -- you're down something less than that. So I think you have to think that -- think about it from that perspective. At the midpoint, yes, you would probably see pressure on both banners, operating margin at the upper end. You'd see a little less on the Family Dollar side. That's the way we're thinking about it right now as we go forward. So again, and it's a lot of moving pieces. To your point, as it relates to the investment, we've laid it out. And obviously, we'll work to how we execute to that at the end of the day. Second part of your question, Chuck, was?
Charles Grom:
Just the composition of gross margins and SG&A in 2018.
Kevin Wampler:
Yes. Yes, I think as we look at it, gross margin, obviously, we look at the product margin itself to be positive as we go into 2018. And obviously, the pressure point is the freight. We look at markdowns to be an area again where we can continue to make some inroads and how we operate there. And again, that's more Family Dollar dominated than it is Dollar Tree, as you might imagine. So that's a piece of it. I think, otherwise, it will also help us to have distribution and occupancy costs. And you heard Gary say this, we'd look at the moving pieces of supply chain. While we know there's pressure on the transportation side, we know we need to get more productivity through our buildings. And so that will be one of the places we'll be looking to improve for the year as well. But as we look at our gross profit overall, there -- we're looking -- at the midpoint of the guidance, there will be some pressure on that of probably 20, 30 bps, basically. On the SG&A side, I think it's going to obviously come down to, again, how it kind of all looks at the end of the day from the standpoint of how we're able to drive sales and leverage it. And again, with the investment, there is some pressure there. So I think at the end of the day, we'll see a little bit more pressure on SG&A. And I would hope that we can drive some sales and leverage them a little bit better from that. I mean, that is part of -- to Gary's point, speaking to the reinvestment into the company is one of the things we're looking for to drive sales to help leverage the fixed costs as we go forward.
Gary Philbin:
Chuck, let me just give my color on maybe a 40,000-foot level. But I think our merchants on both sides, we really see a sight line to exciting product both on imports. And I think continue to drive value with our domestic partners that ought to show up on our shelves in both banners. The pressure on the freight site, like I started off with, we're really going to work very hard to overcome this every way we know how to overcome what seems to be, and hopefully, is something that's a, this year issue. And we'll see. But at least it's upon us now and we're going to work hard on that. On the SG&A side, obviously, we are investing on the labor side and we're going to see the natural pressure. But we're investing in it to maybe get ahead of it. All I know for sure is that when I got good store managers and folks and field managers that are in stores driving the excitement, we do better. And that's really the downstroke we're making to get ahead of it. And I'm betting on our store teams to rise to the occasion and really drive the results that can help us overcome whatever's out there on the SG&A side. But part of it is just selling the right mix of product to help us on the freight side, too. So that's the plan as we go into '18.
Charles Grom:
Okay, that's helpful. Just want to follow-up -- would be, Gary, just to the first question on the call. It sounded like you were striking a little bit more of a cautious tone on the consumer and potentially your comp trends. I guess, is it right to interpret that way? Are you seeing anything over the past few weeks that has you more concerned today than maybe back in November when you provided 3Q?
Gary Philbin:
No, I don't think I've -- I'm always concerned about our customers and how she's shopping. I think my reference point was on the tax credit refunds that are happening. They were pushed back about another week from last year. And so it's the 13th holiday we have at Family Dollar on top of the other 12 first-of-the-months. So we're at the beginning of that holiday really and that was my reference point in talking about the Family Dollar customer. On the Dollar Tree side, man, she's loving everything we're doing on the holidays right now. Kudos to our team. But the energy in the Dollar Tree stores really feels good and showing up on our seasonal holiday sales.
Operator:
That is all the time we have for questions. At this time I would like to turn the call back over to Randy Guiler for any additional or closing comments.
Randy Guiler:
Thank you for joining us on today's call, and especially for your interest in Dollar Tree. Our next quarterly earnings conference call to discuss Q1 results is scheduled for Thursday, May 31, 2018. Thank you.
Operator:
That does conclude our conference for today. We thank you for your participation. You may now disconnect.
Operator:
Good day, and welcome to Dollar Tree, Inc.'s Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Randy Guiler, Vice President, Investor Relations. Please go ahead.
Randy Guiler:
Thank you, Matt. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the third fiscal quarter of 2017. Participating on today's call will be our President and CEO, Gary Philbin; and our CFO, Kevin Wampler.
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. These are included in our most recent press release, our most recent 8-K, 10-Q and annual report on Form 10-K, which are all on file with the SEC. We have no obligation to update our forward-looking statements, and you should not expect us to do so. At the end of our prepared remarks, we will open the call to your questions. [Operator Instructions] Now I will turn the call over to Gary Philbin, Dollar Tree's President and Chief Executive Officer.
Gary Philbin:
Thank you, Randy, and good morning everyone. This morning, we announced our results for the third quarter of fiscal 2017. Sales increased 6.3% to $5.32 billion. Our same-store sales increased 3.2%. By segment, comp sales for the Dollar Tree banner increased 5%. And for the Family Dollar banner, comp sales increased 1.5%. Our gross margin rate improved 90 basis points to 31.3%. Operating income increased 24.2% to $425.2 million, and our operating margin rate improved 120 basis points to 8%. Earnings per share increased 40.3% to $1.01.
I'm really pleased with the terrific third quarter our team delivered with the performance of each of our business segments. The Dollar Tree banner delivered a 5% comp, its best quarterly comp since Q4 of 2014, along with a 20 basis point improvement in its sector-leading operating margin. The Family Dollar banner delivered positive same-store sales of 1.5% and a 190 basis point improvement in operating margin as we continue to gain traction in our -- in the business. Our Dollar Tree Canada team delivered another solid quarter of strong sales coupled with improved margins and expense control. And our Dollar Tree Direct business, while a small portion of our business, delivered low double-digit comp increases in both sales and visits to the site.
Dollar Tree highlights for the quarter include:
Our top-performing categories for the quarter were snacks and beverage, food, household products, health care and stationary. Sales performance was led by discretionary as we delivered one of our best seasonal quarters in years. Both consumables and discretionary comped at better than 4% for the quarter. All 3 months comped positively in the quarter. September was the strongest month in the quarter. And geographically, Dollar Tree same-store sales growth was strongest in the Southwest, Northeast and Midwest; and all of our zones delivered positive comps greater than 3%.
Elements of Dollar Tree's strong seasonal performance included Halloween as we delivered strong comp sales and improved seasonal inventory sell-through, greater than prior year's quarter; while harvest also delivered solid comps during the quarter; and inventory was well positioned as we entered the fourth quarter. Back-to-school was our best season in several years. And Christmas, while it represents a small portion of Q3 as we receive early inventory of our Christmas crafts and early decor items, our initial results were very encouraging. Dollar Tree continues to be strong, consistent and growing. This represented our 39th consecutive quarter of positive same-store sales, and operating margin continues to lead the value sector. Our third quarter performance again validates the relevance of the Dollar Tree brand. Customers love our fixed-price concept and continue to shop for value and convenience. We are very pleased with the traffic and sales results, our merchandise assortment and flow of inventory. Our business model continues to focus on our customers' wants and needs. And it is a different shopping experience from the rest of retail.
For the Family Dollar segment, the highlights of the quarter include:
Top-performing categories were snacks and beverage, refrigerated product, school and office supplies and bedding. Our comp performance was driven by consumables, and sales cadence for the quarter were relatively balanced. The quarter -- were balanced throughout the quarter with each month above 1% comp. September was the strongest comp of the quarter.
Geographically, Family Dollar's same-store sales growth for the quarter was strongest in our West, Mid-Atlantic and Northeast zones. Importantly, all 8 major geographic zones delivered positive same-store sales for the quarter. We continue to make meaningful progress at Family Dollar around the key foundational elements that will drive enhanced performance:
improving the store table stakes, focusing on merchandising value for the customer and consolidating of shared services. Evidence of our progress can be seen in our third quarter results
Feedback we're receiving from our Family Dollar shoppers indicate they are seeing cleaner stores, greater values on the items our customers buy most often, improving product assortments, more consistent in-stocks and better customer service in our stores. We want to be the neighborhood store of choice for the fill-in shopping needs of our Family Dollar customers that typically, live, work and shop near our stores.
During the third quarter, we completed another 191 Family Dollar store renovations as part of our renovation initiative. We continue to be very pleased with the initial results we are seeing in these stores, and especially about the feedback we're receiving from our customers and store teams. Our target for fiscal 2017 is 350 stores, and we will continue to renovate hundreds of older Family Dollar Stores as we improve the business. Elements of the improved store layout include:
better adjacencies and more productive endcaps; expanded beverage and snack, including immediate consumption coolers near checkout; added assortment of food in coolers and freezers; updated hair care assortments; expanded adult beverage in some stores; our shopper-friendly power alley to promote Dollar well items; and a faster checkout process for our customers. Additionally, 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 the Compare and Save component of our Smart Ways to Save program. Each of our brands will contain a 100% customer satisfaction guarantee. These brand improvements are taking place across the store and are already impacting performance in household products, candies, snack and beverage, hardware, vitamins and others. Examples of some of the new private brand labels you'll see in Family Dollar include Catawba Candy, [ eats ], Quest, Chestnut Hill in our food selection, Nature's Measure and Family Wellness in our health and beauty category; HOMELINE and Driver's Choice in our household products; and Tool Bench in our home assortment.
Highlights for the quarter at Dollar Tree Canada included the fact that our stores are delivering better day-in, day-out standards resulting in sales across all departments, with encouraging growth on the discretionary side of the business. Top-performing categories included home decor, party celebrations, stationary and health and beauty care. On the seasonal side of Dollar Tree Canada business in Q3, our back-to-school, harvest and Halloween programs all showed nice year-over-year improvements in both comps and inventory sell-through. Our efforts to train, retain and develop our store teams are showing up with better top line sales and bottom line performance store by store. We opened 2 new stores in Canada, bringing our total Canadian stores to 226. For Dollar Tree Direct, the digital division of Dollar Tree, it's providing an opportunity to broaden our customer base, drive incremental sales, expand brand awareness and attract more customers into our stores. A few highlights of our Dollar Tree Direct business. We had another productive and profitable quarter as we experienced low double-digit increases in sales and traffic. We are seeing a continued increase in customers visiting DollarTree.com from their mobile devices. Our third quarter marketing was heavily focused on back-to-school and back to campus with a goal to drive both in-store and online traffic and sales. Our customer engagement at DollarTree.com continues to help and create activities in holiday themes that are shared across Facebook, Pinterest, blog posts. And we continue to use many of our how-to videos as an extremely effective digital marketing medium for Dollar Tree. These videos are placed on our website as well as various marketing channels, such as email, Facebook, Pinterest, blog posts. I encourage you to view our sites for yourself at DollarTree.com and familydollar.com.
Now looking at real estate in the third quarter. We opened a total of 169 new stores:
99 Dollar Tree and 70 Family Dollars. We relocated or expanded 23 stores
I'll now turn the call over to Kevin to provide more detail on the third quarter performance and our outlook for the remainder of our fiscal year. Kevin?
Kevin Wampler:
Thanks, Gary, and good morning. Total sales for the third quarter grew 6.3% to $5.32 billion. Dollar Tree segment total sales increased 8.8% to $2.69 billion, and Family Dollar segment total sales increased 3.8% to $2.63 billion. Enterprise same-store sales increased 3.2% on a constant currency basis or 3.3% when adjusted for Canadian currency fluctuations. On a segment basis, same-store sales for the Dollar Tree banner increased 5% or 5.2% when adjusted for currency fluctuations. And the Family Dollar banner increased 1.5%.
Gross profit for the combined organization increased 9.6% to $1.67 billion for the third quarter of 2017 compared to the prior year's quarter. As a percent of sales, gross profit margin improved 90 basis points to 31.3% versus 30.4% in the prior year's quarter.
Gross profit margin for the Dollar Tree segment was 35.1% for the third quarter, a 30 basis point improvement compared with the prior year's third quarter. Factors impacting the segment's gross margin performance during the quarter included:
lower occupancy costs due to the leverage from the comp sales gain and lower merchandise costs based on improved markup.
Gross profit margin for the Family Dollar segment was 27.5% during the third quarter compared with 26.2% in the comparable prior year period. The 130 basis point improvement was primarily due to lower merchandise costs, lower markdowns and lower distribution costs. Consolidated selling, general and administrative expenses as a percentage of net sales in the quarter improved 30 basis points to 23.3% from 23.6% in the same quarter last year. Third quarter SG&A expense for the Dollar Tree segment as a percentage of sales increased 10 basis points to 23.3% compared to the prior year's quarter of 23.2%. Higher store payroll costs, incentive compensation and lower other income were mostly offset by lower utilities and depreciation as a percentage of sales. SG&A expense for the Family Dollar segment as a percentage of sales was 23.4% compared to 24% in the prior year's quarter. The 60 basis point improvement was a result of lower depreciation costs; lower workers' compensation costs; lower payroll costs related to the harmonization of vacation policies; and lower health insurance, utilities and debit and credit card fees, partially offset by higher expenses primarily related to incentive comp, repairs and maintenance, store supplies, advertising and legal fees. Operating income for the enterprise increased to $425.2 million compared with $342.4 million in the same period last year. Operating income margin improved 120 basis points to 8% for the quarter from 6.8% in last year's third quarter. Operating income margin for the Dollar Tree segment improved 20 basis points to 11.8% when compared to the prior year's quarter. Operating income for the Family Dollar segment increased $51.5 million to $107.9 million, a 190 basis points improvement as a percentage of sales when compared to the prior year's quarter. Nonoperating expenses for the quarter totaled $70.1 million, which was comprised primarily of net interest expense. Our effective tax rate for the third quarter was 32.4% compared to 25.5% in the prior year's quarter. The prior year's third quarter included a onetime tax benefit of $21.4 million or $0.09 per share related to a 1% decrease in North Carolina's state tax rate, which decreased the deferred tax liability related to the trade name intangible asset. For the third quarter, the company had net income of $239.9 million or $1.01 per diluted share compared to the reported net income of $171.6 million or $0.72 per diluted share in the prior year's quarter. As a reminder, last year's Q3 reported earnings of $0.72 per share included both a $0.09 benefit related to the tax rate, as I just mentioned, and a $0.09 charge related to debt refinancing costs. Looking at the balance sheet. Combined cash and cash equivalents at quarter end totaled $400.1 million compared to $866.4 million at the end of fiscal 2016. Our outstanding debt is approximately $5.8 billion, a decrease of $1.4 billion from the end of the third quarter of 2016. The company continues to focus on its stated goal of returning to investment grade for its debt rating. We expect our rent-adjusted debt-to-EBITDA ratio to be below 3.5x at fiscal year-end. Inventory for the Dollar Tree segment at quarter end decreased 2% from the same time last year, while selling square footage increased 4.6%. Inventory per selling square foot decreased 6.3%. We believe that current inventory levels are appropriate to support scheduled new store openings and our sales initiatives for the fourth quarter. Inventory for the Family Dollar segment at quarter end increased 9.2% from the same period last year and increased 6.9% on a selling square foot basis. We're pleased with the progress we're seeing in our in-stock level on key items. We are continuing to review merchandise assortments and believe our current inventory levels are appropriate for the fourth quarter. Capital expenditures were $177.7 million in the third quarter of 2017 versus $95.6 million in the third quarter last year. For fiscal 2017, we're planning for consolidated capital expenditures to range from $680 million to $700 million. Capital expenditures will be focused on new stores and remodels, along with the renovation of 350 Family Dollar stores. The company now expects to complete approximately 1,080 store projects in fiscal 2017, an increase of 65 from the beginning of the year. The increase is driven by approximately 100 additional Family Dollar renovations, net of approximately 30 less new Dollar Tree stores in 2017. In addition, CapEx includes the addition of frozen and refrigerated capability to a total of 400 new and existing Dollar Tree stores, expansion of frozen and refrigerated for 300 Family Dollar stores, IT system enhancement and integration projects and the initial phases of construction of a new Dollar Tree banner distribution center in Warrensburg, Missouri and our store -- our Chesapeake store support center expansion. Depreciation and amortization totaled $149.4 million for the third quarter. Depreciation and amortization expense was $157.6 million in the third 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:
Fiscal 2017 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 states increasing minimum wages and general average hourly rate increases. We have budgeted higher import freight costs and diesel costs in the year ago. Net interest expense will be approximately $74 million in our 14-week Q4.
For Q4, nonoperating income will include $7.4 million or $0.02 per share benefit for recognition of the completion of all requirements for the forgivable promissory note issued by the state of Connecticut for the construction of our Windsor, Connecticut distribution center in 2012. Our guidance does not include any share repurchases. 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 36.2% for the fourth quarter and 34.7% for fiscal 2017. Weighted average diluted share counts are assumed to be 238.1 million shares for Q4 and 237.7 million shares for the full year. For the fourth quarter, which includes 1 extra week, we are forecasting total sales to range from $6.32 billion to $6.43 billion, and diluted earnings per share in the range of $1.80 to $1.89. These estimates are based on a low single-digit same-store sales increase and year-over-year square footage growth of 3.7%. For fiscal 2017, we're now forecasting total sales to range between $22.2 billion and $22.31 billion compared to the company's previously expected range of $22.07 billion to $22.28 billion. The company now anticipates diluted earnings per share for fiscal 2017 will range between $4.64 and $4.73, which includes $53.5 million or $0.14 per diluted share of receivable impairment charges. These estimates are based on a low single-digit same-store sales increase and 3.7% square footage growth and includes the benefit of the 53rd week occurring in Q4 of fiscal 2017. I'll turn the call back over to Gary.
Gary Philbin:
Thank you, Kevin. We are very proud of the results that our teams delivered across our nearly 15,000 stores. Our merchants have teed up an exciting holiday experience at Dollar Tree and Family Dollar. Our supply chain teams have worked hard to deliver holiday goods with 2 major hurricanes affecting our normal business routines. And our store operators are now prepared for the biggest, most exciting 6 weeks in our retail year.
The retail environment, ever-changing, provides both banners opportunities to take advantage of our customers' wants and needs, and our management team has demonstrated over the years their ability to be nimble and deliver results when challenged by the external environment. At each of our business segments, we're focused to deliver on our customers' needs. Our initiatives at both banners have helped to deliver on sales, margins, expense control and, ultimately, customer satisfaction. We're proud of what we have achieved and look forward to the energy around the remaining major holidays ahead of us. Before we turn the call over to Q&A, I'd like to share a few comments on the recent storms. As you all know, late August, early September, the states of Texas, Louisiana, Florida were hit by Hurricanes Harvey and Irma. Many of our store associates and customers were personally affected by these storms. Our efforts have been to help our Dollar Tree and Family Dollar associates and help the impacted communities through our partnership with the Red Cross. I want to give a special shout out and thanks to the thousands of associates at both Dollar Tree and our Family Dollar banners, who worked tirelessly to have their stores open and serve their customers in preparation for and recovery from these devastating weather events. Across both banners, we saw great teamwork, passion, dedication throughout our organization. My personal thanks for all the efforts made in the stores, distribution centers and support centers and our many vendor partners that enabled us to get the impacted stores up and running in the hours and days after the storms' impact. Operator, we're now ready for questions.
Operator:
[Operator Instructions] And your first question will come from Matthew Boss with JPMorgan.
Matthew Boss:
So can you speak to gross margin drivers at the Family Dollar banner? Obviously, a great quarter. But specifically, can you talk to customer reception to the recent rollout of some of your private brands there? And just how do you rank forward gross margin drivers at FDO?
Gary Philbin:
Well, I'd say it's a lot of the elements that we've been talking about, Matt, from the beginning. Of course, some of it's the initial steps on synergy between the banners, both on direct and similar items. The Smart Ways to Save program that we've implemented from the beginning has given us the ability to drive business across each of those metrics. So with our Dollar well, which gives us some ability to drive higher-margin items, and we know how to do that from another banner. We've -- the Compare and Save on the private brands has really been, I would say, just at the beginning stages of that. Now you're starting to see some of those brands out there in each of the categories. I mentioned some of them. But I would say at this point, the primary impact has been across consumables, both in food and some of our household products. And where we're introducing those and getting critical mass, we're seeing additional penetration growth on the consumables side of the label change. I think it just gives our customers greater confidence in the packaging. The marketing of the brands itself is more geared towards the -- each of the categories that we operate in, whether it's center-of-the-store food, or beverage or household products. And it gives our customers, I think, the confidence to buy what are great values on the shelf compared to national brand. And this isn't either/or. We want to do both. And so our opportunity to enhance the packaging has been a big piece of that. I would tell you there's also been just the nuts and bolts of us getting our pricing in line. We're more competitive than 2 years ago. Our customers have greater confidence on the retails on shelf. It still means that we have promotion on the items they buy most often. And I would say our Smart Ways to Save element of our Family Dollar business also now has been well received, and we -- during the quarter, we did start a new app, Family Dollar, that gives our customers easy access to some of the great savings. And while we're at the beginning stages of getting a customer base there, what it allowed us to do is really touch the customers who buy week in and week out most often and provide them savings on the items they buy most often. And so it's the combination of all those things that have been driving margin. And the continued emphasis on private label, driving discretionary, driving more imports, all those things that we've talked about from day one are all the pieces that continue to drive progress at the Family Dollar level, both on sales and margin.
Matthew Boss:
That's great. And then just a follow-up, Gary, and more higher level. How would you speak to the health at the low end? We seem to be seeing some laterals even outside of the Dollar Store segment. And judging by the trends that you're seeing in discretionary, and I think you cited the best in a long time there, are you starting to see any signs of some wallet opening? Just best way to characterized what you're seeing out there with your core customer. And do you think it's sustainable?
Gary Philbin:
I think I would answer it 2 ways, Matt. I think on one side, it's just us executing better. And that speaks to 1st of the month and getting our stores ready and in-store execution on all the store table stakes. So at a very high level, let's go get our fair share. And I think I've mentioned before, we have seen the increase of EBT benefits at Family Dollar, even though across the country, they're down. Small portion of our tender type but still, I think it speaks to just having the confidence when our customers come in at the most important time of the month, and that's at the beginning. I would say I think this is a customer that still is under pressure. Rents continue to rise. Health care continues to rise. We have to be right on when they have money in their pocket. We call it thrive and survive. So certainly, at the beginning of the month for our most needy customers, we need to be ready in-store with the basics, and at the end of the month, give them the right choices on the items that continue to give them a reason to come shop us at the end of the month when they're trying to stretch their budget. So we got to stay focused on that customer who might have a little more jingle in their pocket. But we have to got to be grounded on everyday great retails, and they got to have confidence that we're in-stock with them in-store. So it's a combination of doing both those things.
Operator:
[Operator Instructions] And we will now move to Dan Wewer with Raymond James.
Daniel Wewer:
Gary, first question is regarding the Dollar Tree segment. Can you discuss what kind of comp sales benefits that you're now getting from the rebanners at the Family Dollar and Deals stores? And then further, with operating margin for the Dollar Tree segment now at a lifetime high, what kind of headroom for improvement remains given that this is a discount or not a specialty retailer?
Gary Philbin:
Well, I'm honored to be considered a specialty retailer, but I think it's 2 pieces, I think, are driving the results for us, Dan. Upside on operating margin, we're very proud of the results. I would say it's driven right now because of just the ability for us to get smarter across each of our store clusters. Our merchants have done a terrific job on the values. And I'm not speaking to anything that's new to this business, but our ability for our merchant teams to create value has always been the focus. It has to be worth more than a dollar. And when we really hit it right, we share that across all of our stores and all customer types that come into the stores. And I think we're most proud of our ability to do that day in, day out. But when you get to the holidays, that's really our time to shine. And so there's always upside. We're never completely satisfied how we go through all the seasons. We see the ability to do a little bit more as we do the postmortems on each of the holidays. And I think our opportunity to just continue to do a little bit better as we drive our initiatives around -- some are around sales. Some are around margin. Some, of course, are always around SG&A. I think those are the building blocks for us to say, how do we continue to drive incremental margin? And give me a repeat on the first question, Dan? Oh, the rebanners. Got it.
Daniel Wewer:
The same-store sales benefit from the rebanners.
Gary Philbin:
Yes, thank you for that because I think in the background of our comp store sales, we've had 300 Family Dollars rebannered to Dollar Tree. We've had over 200 Deals get rebannered really from '15 and '16 on both those. Along the way, we've had 200 more Dollar Tree relos. And initially, the impact is one of cannibalization, and we're pleased with the comps we're getting now. And it's a combination of a couple of things. Just getting store managers in the seats that go through our holiday seasons because it is different, and you have to know how it's going to flow from season to season. And so our folks are more grounded there. It also allowed our real estate teams to figure out on our pipeline where should the next store go because suddenly, we were putting some stores in some geography that we already had plans for. So we're pleased with what that's doing for us, both on the Family Dollar side and Deals side. It speaks to both customers. Also, by the way, we had 11 Dollar or Deals stores convert to Family Dollar, which, while not as big, also are producing nice comp for us on the Family Dollar side. So they're certainly both an engine for us right now as we go through comps in 2017.
Daniel Wewer:
Also, I just had a real quick follow-up for Kevin. You noted that your debt/EBITDA rate drops to 3.5 by year-end. Do you think that will be sufficient for the company to regain an investment-grade rating? And if so, what would be the benefits for your operations and financials from regaining investment-grade rating?
Kevin Wampler:
Yes, Dan, I mean, from day 1, the day we announced this acquisition, we stated the fact that our goal was to get back to investment grade. And as always, we think about it from a flexibility standpoint. And being investment grade gives us more flexibility in the financing world at the end of the day. Obviously, we're on that track. We, obviously, will work with the rating agencies. We provide updates to them. Obviously, it's their decision as to whether we -- whether they decide to upgrade us or not, but I think we're doing our part of the equation, so to speak. So we'll continue forward with that. But I mean, obviously, the flexibility in the marketplace and the potential to see lower interest rates as investment grade as opposed to [ spike up to it ]. So those are the things we look at.
Operator:
We'll now hear from Alan Rifkin with BTIG.
Gary Philbin:
Alan?
Alan Rifkin:
Hello? Can you hear me?
Gary Philbin:
There you are. Go ahead, Alan.
Alan Rifkin:
On the Family Dollar side, certainly your gross margin gains are very admirable. But going forward, would you sacrifice some of the gross margin gains for a higher comp?
Gary Philbin:
Well, we try to do both with everything we know going to the quarter, and it's a combination of really understanding where we are in the marketplace and the competitive sets. We obviously, like everyone else, understand what's going on with pricing out in each of the markets that we operate in. We do have our own pricing strategy and competitive set on our promotional activity. We can always do more, Alan. And I would say, even with the 1.5% that we produced, we certainly saw opportunities during the quarter that we could do better. Everything we know right now, we baked into the forecast. So the magic here is continuing to drive improvement across all those. It's not just comp store sales, it's not just gross margin improvement, it's not just SG&A. We talk about each of them, and we get down to the detail. So when there's an opportunity for us to drive business, we try to take advantage of it. We try to also back that up with how do we deliver margin and SG&A. What I'm pleased with, with the Family Dollar team, we've really had great growth on just the opportunity to really focus on what a Family Dollar customer and what they buy most often. Shows up in the ads, of course, but it's also showing up on our everyday retails on the shelf. And it also shows up with our Family Dollar app. So if it's a mom who buys diapers, we can deliver something above and beyond to them. And that speaks to us getting to know that Family Dollar customer better. We have more stores in urban America than anyone else. I think it speaks to us knowing our customer better than anyone else in the arenas that we compete in. And executing on the store level is the other side of that. And so it's all those things that go into driving that comp, combined with how do we deliver on bottom and -- bottom line, Alan.
Alan Rifkin:
And my follow-up, if I may. Was there any benefit or impact both to revenues or operating margins with respect to the FLSA implementation or the SNAP implementation or inflation or deflation within commodity products?
Gary Philbin:
Well, the FLSA, of course, started off and then stopped last year in December. So about this time last year, we were talking about it, and then it was pushed off the front burner. And SNAP benefits, I think across the country, there's less households participating in it. But as I said before, I think our opportunity at Family Dollar is getting our fair share of that. And I'm pleased that we've been able to increase our penetration on the quarter year-over-year, and that just speaks to our ability to do more around 1st of month and getting ready for it. And what was the third point? You're...
Kevin Wampler:
[indiscernible]
Gary Philbin:
Oh, they -- we're cycling some of the commodities, I would say, in our world. You see some of it in dairy. Probably eggs is the biggest one right now where we've had a boom-bust cycle now on eggs going back and forth. But we're not a grocery store. We're not in the same arena as that. And so it doesn't impact us as much as the folks in that sector. And again for us, going to this fourth quarter, our opportunity is now for both banners is around the discretionary side where we break out some great values both on the Dollar Tree and Family Dollar side to drive our business for Q4. So teams have done a nice job getting focused on that and delivering it into the stores. And we've got the 5 to 6 biggest weeks ahead of us now to deliver on that.
Operator:
And we will now go to Chris Prykull with Goldman Sachs.
Christopher Prykull:
I just wanted to talk about the free cash flow generation of the business a little bit, particularly as we continue to progress further through the Family Dollar integration. How should we think about CapEx in fiscal '18 and beyond? And how are you thinking about the timing for potential resumption of the share buyback program?
Kevin Wampler:
Yes, Chris. As we look, obviously we're well into our budget planning for 2018. Obviously, we'll give full view of the guidance and CapEx next quarter with the next quarter report. But I would tell you that CapEx, we're going to continue to grow. We have some barriers from a store standpoint and a infrastructure standpoint. So I would not expect CapEx to be less than it did this year. In fact, it's probably going to grow a little bit as we sit here today. And again, we'll give you more color on that as we go forward. But I think free cash flow is important. Obviously, it ties into everything we're doing as far as paying back our debt. And as we look at it longer term, once we get back to investment grade, then that gives us the ability to relook at our capital structure and consider other things that have been important thesis of the way we looked at using cash in our past. So as we go forward, I think we'll continue to generate significant free cash flow. It puts us in a very good, flexible place going forward.
Christopher Prykull:
Great, that's helpful. And then one follow-up. As you look sort of past the Family Dollar integration longer term, how should we think about the core earnings growth algorithm for the business at that point in time? Is it fair to think about it in a similar fashion to what you all used to deliver before the acquisition?
Kevin Wampler:
Yes, I don't know that we've ever had an algorithm that we've referred to in regards to it. I mean, the main thing is we put our guidance together. We're always looking to improve our business. We're always looking to grow sales, grow comp sales, grow our store base, grow our profitability, which has been one of the hallmarks of the Dollar Tree brand, continue to work to increase that operating margin. And again, each and every year provides a different set of circumstances. As we've went through the years, you face different things. Sometimes there's inflation or deflation and product costs. There can be increases and decreases in fuel. And obviously, labor is a component as we continue to go forward and look at the labor market. So all those things play into it. And so our viewpoint is -- our job as management is to come up with a plan that will continue to improve our business as we go forward. The things that are increasing, we have to determine ways that we can become more efficient. We have to improve our processes. We have to improve the way we go to market, everything we do, the way we supply our stores. So all those things are always in the back of our mind, and we build initiatives around them to move our business forward each and every year. So I don't know that there's an algorithm other than the expectation for growth. And as we go forward, that's the way we think about it.
Gary Philbin:
And Chris, I would just add my color to it. I think both Dollar Tree and Family Dollar, we're a company that's going to grow hundreds of stores each year. When other retailers are potentially pulling back, I think it's still a great opportunity for us to deliver value and convenience in this value sector, which I think is the place to be for both our -- both of our brands. And the initiatives that we have around driving productivity by store, by category will remain foundational elements of us. And we will be something different long term then we are now with additional categories that come into the store and create excitement. We've always done that over the years from what were small boxes in the malls to something that delivers on both basics wants and needs for our customers at Dollar Tree. And we're at the beginning stages of that of Family Dollar with renovations, improving productivity, changing the shopping experience. So those are just some of the elements that I think will continue to drive upward momentum on ours sales as we look into the future.
Operator:
Next we will go to Scot Ciccarelli with RBC Capital Markets.
Scot Ciccarelli:
So we know you guys had to make some sizable investments as part of the acquisition of Family Dollar, both in the CapEx side as well as the expense side. Can you help us better understand kind of where you stand today in that investment spending process and maybe quantify how much more spending still needs to happen now that we're 2 years through the integration process?
Kevin Wampler:
Scot, I think as I look at it, we've talked about synergies. We talked about the cost to achieve synergies and the fact that we have -- we originally said approximately $300 million of costs to achieve synergies. And we've said that they've been -- over 50% of those costs have been CapEx and it that -- and a lot of that related to the rebannering of stores as well as the -- looking at systems and making changes and so forth. So most of that is behind us. There will be some continued systems work as we go forward. The other big area that we've continued to invest in is in regards to deferred maintenance, especially within The Red Banner. And as we -- I think practically every quarter since the close of the acquisition, you've probably heard me say that one of the SG&A items at the top is repairs and maintenance. We continue to look at that. We still believe we have things that we want to continue to do to improve the Family Dollar stores from a repair-and-maintenance standpoint. And again, as part of our table stakes, that goes hand-in-hand. So there will be a continued investment, but I don't -- it's always built into our guidance as we go forward for those expenses. And from a capital side, they would be within our guidance as well. But -- so I don't see it being out of the normal. It's somewhat part of the run rate as we go forward. I don't see a big blip on the go-forward map, so to speak, that says all of sudden there's going to be a surprise investment there. But there will be continued investment going forward.
Scot Ciccarelli:
And Kevin, and what else would be, kind of following to that, operating expense that may need still to kind of flow through the P&L? Is there anything notable on that?
Kevin Wampler:
Other things it could be, there could be some consulting dollars as -- especially as we work through some of the system-type things. Sometimes we need to bring in some consulting help in those type of initiatives. So that's probably one of the main areas.
Operator:
And our next question comes from Michael Lasser with UBS.
Michael Lasser:
It's on the remodel of Family Dollar Stores. What sort of productivity and profit lift are you seeing in the remodels that you had done initially?
Gary Philbin:
Michael, it's Gary. We're pleased with that. We have not called it out as the circle continues to grow on a number of stores, we're going to affect up to 350 this year. I think the primary elements of the relo you heard me -- or renovation that you heard me talk about really speak to what the customer sees. And part of that is just adjacencies of product. It's introducing more Dollar well. It's adding some more items that they need, especially in frozen food assortment. It's some of the surprise and delight of the power alley and well. It's more Dollar items throughout the store. And it's really giving our customers, I think, just a fantastic shopping experience and one that invites them to spend more in the store just because some of the items. And one of the basics we have, diapers, next to our kids, newborn, infant, toddler wear and the synergy of having a mom shop both of those is obvious. So those are some of the things that the store ought to deliver for us. As we continue to do more renovations, we're looking at some of the oldest stores in the fleet, what we would call traditional stores, and an opportunity to bring them up to a brand standard. And the expectation is that we can drive a payback on this that meets all of our internal requirements on it. So we like where we're at. We're going to plan to do the remaining of the stores in January to get us up to 350 for this year. And we're going to certainly be doing hundreds of them next year to continue to drive the progress forward. So more to come on it. We like what we see, and it's a great opportunity for our customers to see really a new Family Dollar inside the 4 walls and invite them in to see a new shopping experience.
Michael Lasser:
And as part of the remodels that you're doing, you're adding more coolers and freezers? So presumably, that's adding more customer trips and more sales volumes. Is that right?
Gary Philbin:
Well, we'd like that. Now not every store has exactly the same number of coolers and freezers. So some get more than others. Some have the right configuration. But you're exactly right, especially in frozen food. Our customer can store that in a 2 by 3 section at home of their refrigerator and freezer. It does invite more trips. It also, I think, gives them some of the basics that they need every day. So it does, we think, drive traffic. We certainly saw it on the Dollar Tree side as we expanded frozen food years ago and continue to. And I think it speaks to a category that our customer needs.
Michael Lasser:
And my follow-up question's on the fourth quarter guidance. The 3.3% enterprise comp in 3Q, presumably under your nomenclature, that's below the mid-single-digit comp and that you're guiding for a low single-digit comp in 4Q. Is there any reason to believe why the business should slow in 4Q versus 3Q?
Kevin Wampler:
Michael, obviously, when we put our guidance together, it's with everything we're know. We're obviously early in the quarter. We're 3 weeks in of a 14-week quarter. We've got the 6 biggest weeks ahead of us. Doesn't mean we believe it's going to slow. We're very encouraged with our business. The third quarter was very encouraging. We feel very good about our inventory position, where we're at, and the flow of our goods as we look at the fourth quarter. So I think those are all very, very encouraging things. But we've still got to go out and execute it at the end of the day. And so we put what we know and what we believe in and know we can hit. And we hope to hit basically in the fourth quarter and then go forward from there. And obviously, our goal is always to overachieve, and that's what we'll work to do.
Gary Philbin:
And I would just add the -- against that backdrop is really just merchandise energy. Because when it comes right down to it, we've got to get the right product to the right stores. But it also has to speak to the values that our customers will see in-store. I really think what the merchant teams have done on both banners to drive the surprise and delight that you need, sprinkled onto both banners this time of the year, is in place. And the store teams have worked hard. But to Kevin's point, we're ahead of even Thanksgiving this week. So the most exciting 6 weeks in retail, our in-stores call Dollar Tree and Family Dollar, I think. We're geared up and ready for it, and now we have to go execute.
Operator:
And our next question is from Edward Kelly with Wells Fargo.
Edward Kelly:
Can we just go back to Family Dollar for a minute here? So the margins, obviously, look great. The progress on the top line continues to be, I guess, I would categorize it as slow. Could you maybe just provide a little bit more color on what you see as the key hurdles at this point to driving better comps there, the initiatives that you've got to get over those hurdles? And as we sort of think about progressing forward, not just Q4 but even into next year, what type of progress are you looking for internally to tell you that you're getting traction?
Gary Philbin:
Edward. Gary. Thank you for the question. Well, listen, I'm pleased with the results. To say we can always do better is what we are all about. So it's just part of our nature. Yes, we think we can do better. I would just call out, though, in Q3, we're living some of the echo from the boom of our clearance event back in Q3 of 2015 where we really cleared out the old merchandise at Family Dollar, drove lots of footsteps and sales in the quarter. And so it was maybe a bit of an aberration because of the spending we did to clean up the stores of old merchandise and resonated well with our customers. So part of our comp last year was obviously going against that. So year-over-year, if you take a look at the 2-year stack but then take a look at the 3 year, I think it might tell a better story. At least it does to us internally as we view the business. Nevertheless, what we continue to work on at Family Dollar is driving consistent comp top line. We think it's there. But we think it's there by doing the things we've been talking about. We -- the table stakes will continue to address what our customer sees, primarily around in-stocks and customer service; getting ready for 1st of the month; having the right item at the right time; all the things that we've been doing on private label that drove the value of the items. The renovations, we need those. And we have a couple of hundred a day. We'll get to 350 by year-end. But addresses the stores that are, I think, to some degree, our biggest opportunity to drive comps and most at risk. If we don't, just because they tend to be older and the adjacencies aren't right. So it's never one thing. It's all these foundational elements that we've been working on from the beginning that start to show up in comp store sales. That's what Duncan and team, merchants, operators at Family Dollar are focused on every day. And so over the long term, this will be something that we continue to work on, address and deliver top line and bottom line results on.
Operator:
We will hear from Paul Trussell with Deutsche Bank.
Paul Trussell:
I wanted to touch on a number of factors that are impacting margins, both this past quarter and how we should think about it moving forward. If you can just detail a bit the pricing and promotional environment as well as payroll and labor cost. And then, Kevin, you also mentioned, I believe, incremental hurdles to be faced on diesel and freight. If you can just touch on each of those factors, both in terms of third quarter and going forward.
Gary Philbin:
I'll let Kevin take a start, but I'll do the follow up, Paul.
Kevin Wampler:
Yes. So obviously, if you look at labor, we've said from the beginning of the year that we expected there to be pressure on our store labor. And to no surprise, given the various states that have now set their own specific minimum wages as well as just the general pressure from an increase in average hourly rate, probably the -- we're seeing the largest increase probably since pre the Great Recession basically at this point in time. But -- so obviously, we expected that and built that into our model as we entered the year. And again, we're -- we look at the labor markets, and we're competitive in the individual markets we're in. We look at them in that direction and feel pretty good about where we're at overall. And -- but again, it will continue to be a pressure as we go forward, and it's built into our guidance. Obviously, diesel is roughly, I want to say, about $0.50 higher per gallon than it was a year ago at this point in time. I think for the third quarter itself, it was closer to maybe a $0.30 to $0.40 average higher. So there's a little bit of headwind there as well as from ocean freight. As we talked about, with the contract that started in May, our ocean freight rates came up a little bit. So that's been in our guidance all year as we go forward. We'll have to see how we look at that one as we go into next year. There may continue to be a little bit of pressure there. There's been some additional consolidation in the ocean freight carriers. And there's been even some consolidation, obviously, in domestic freight carriers as well. So we'll continue to look at those things. But again, we always look at them, Paul, as things that we know we see them coming. We have to react accordingly and determine how we can offset them in some way, shape or form, whether its changes in how we operate or finding other line items where we can offset those cost increases if they happen to be cost increases. So that hasn't changed. It's part of our DNA. It's the way we think about things as we go forward. But again, all those things are built into our guidance as we go forward.
Gary Philbin:
And I would just add as we enter the holiday season here, really on the pricing and promotional piece. I'm pleased with where we are on our everyday values on the shelf across all the Smart Ways to Save that we offer our customer. I think our opportunity as we look forward into the holiday, we have some great promotional activity planned at Family Dollar, at Dollar Tree. Hey, it's everything's $1, but the values are better than ever. Come and get it. But at Family Dollar, I think we're going to have a great holiday season based on what we see in the marketplace today. The values that we have out there, the assortment and offering we have out there I think is going to resonate with our customers. And I think we're geared up at Family Dollar to have a great fourth quarter. Dollar Tree, our seasonal, our store teams, our merchants have teed up everything to get us to this point in the season. It really sort of kicks off this week with Thanksgiving and then on to Christmas. But we really feel good about where we were with inventory assortment and getting our stores prepped.
Paul Trussell:
And then lastly, just 9 months into the year in terms of reported results, has there been any change at all to the ultimate opportunity to -- for Family Dollar's margins? Or any changes to the thought process around the pace of expansion, ultimate time table to achieve the goals?
Gary Philbin:
Well, I don't know if it's changed. I think the elements that drive it are the things that we work on just from the standpoint of most everything we've talked about. But I would say on the import side, which is always one of the levers that has driven success at Dollar Tree and is an integral part of what we're doing at Family Dollar, you've got to remember we bought Christmas [ Brighton ] basically almost a year ago, right after the Christmas holiday. And so you take all your learnings, you go over, you find the next-best values, you make your strategic reviews and you go buy it. We'll learn something again this year. But that's an iterative process on each holiday and each buying trip we go over. That's the one that probably takes you a little bit longer to go through the seasons and have merchants in the seats to understand what's working the way they thought, where is the bigger opportunity, what needs to get fixed as you look forward. The rest of it, we continue to do the blocking and tackling. Let's find an opportunity to sell our customers private brand and to drive great selling endcaps in our stores that have new and exciting product on there. So I think we've -- we like where we're at. We see the opportunity ahead us and focused on building a plan for '18 that reflects all that as well.
Operator:
And that concludes our question-and-answer session. I will now turn the call back over to Mr. Guiler for any additional or closing remarks.
Randy Guiler:
Great. Thank you, Matt. Thank you for joining us for today's call and for your continued interest in Dollar Tree. Our next quarterly earnings call to discuss Q4 and our full 53-week year week -- 53-week year fiscal 2017 results is tentatively scheduled for Wednesday, March 7, 2018. Have a good day.
Operator:
And that does conclude our conference for today. Thank you for your participation. You may now disconnect.
Operator:
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.
Randy Guiler:
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.
Bob Sasser:
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.
Gary Philbin:
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. [indiscernible] 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
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?
Kevin Wampler:
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: [Audio Gap] 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.
Bob Sasser:
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
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:
[Operator Instructions] And our first question, we'll hear from Nick (sic) [ Scot ] Ciccarelli with RBC Capital Markets.
Robert Iannarone:
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?
Gary Philbin:
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.
Robert Iannarone:
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?
Gary Philbin:
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.
Operator:
Next we'll move to Matthew Boss with JPMorgan.
Matthew Boss:
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?
Bob Sasser:
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.
Matthew Boss:
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?
Kevin Wampler:
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:
[Operator Instructions] Next we'll move to Paul Trussell with Deutsche Bank.
Paul Trussell:
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?
Kevin Wampler:
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.
Paul Trussell:
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?
Gary Philbin:
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.
Operator:
Next we'll move to Michael Lasser with UBS.
Michael Lasser:
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?
Bob Sasser:
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.
Michael Lasser:
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?
Bob Sasser:
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.
Kevin Wampler:
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.
Operator:
And next we move on to Dan Wewer with Raymond James.
Daniel Wewer:
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?
Kevin Wampler:
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.
Daniel Wewer:
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?
Kevin Wampler:
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.
Daniel Wewer:
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?
Kevin Wampler:
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.
Operator:
And we'll move on to Charles Grom with Gordon Haskett.
Charles Grom:
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?
Bob Sasser:
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.
Charles Grom:
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?
Gary Philbin:
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.
Operator:
And we do have time for a couple more questions. We'll hear from Kelly Halsor with Buckingham Research Group.
Kelly Halsor:
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?
Gary Philbin:
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.
Operator:
And our final question today will come from Brad Thomas with KeyBanc Capital Markets.
Bradley Thomas:
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?
Bob Sasser:
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.
Bradley Thomas:
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?
Bob Sasser:
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.
Operator:
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.
Randy Guiler:
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.
Operator:
And that will conclude today's call. We thank you for your participation.
Operator:
Good day, and welcome to the Dollar Tree, Inc.'s First 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 of Investor Relations. Please go ahead, sir.
Randy Guiler:
Thank you, Christina. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the first 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, most recent 10-Q and annual report on Form 10-K, which are all on file with the SEC. We have no obligation to update our forward-looking statements, and you should not expect us to do so. At the end of the first quarter, the receivable balance from Dollar Express related to the transition services agreement for the divested stores was $50.9 million. As discussed in our press release and financial tables, the company has impaired the entire receivable. An additional receivable of $2 million or more from Dollar Express is expected in the second quarter, which we anticipate will also be impaired. The company plans to take all appropriate actions, which we expect to include litigation, to enforce our rights. Thus, we are unable to provide further details or take any questions related to this matter. Unless otherwise noted, all SG&A, operating income, net income and earnings comparisons presented today do exclude the impact of the $50.9 million receivable impairment charge for the first quarter of 2017. Please refer to the table in today's press release for a reconciliation of the GAAP financial measures to the non-GAAP financial measures that exclude the impairment charge. At the end of the -- our prepared remarks, we will open the call to your questions. [Operator Instructions] Now I will turn the call over to Bob Sasser, Dollar Tree's Chief Executive Officer.
Bob Sasser:
Thanks, Randy. Good morning, everyone. This morning, we announced our results for the first quarter of fiscal 2017.
Consolidated sales for the first quarter increased 4% to $5.29 billion. Same-store sales increased 0.5%. By segment, same-store sales for the Dollar Tree banner increased 2.5%; and for the Family Dollar banner, same-store sales decreased 1.2%. Our combined gross margin rate improved 20 basis points to 30.8%. Consolidated operating income increased 5% to $439.7 million. And our year-over-year consolidated operating margin improved from 8.2% to 8.3%. Total net income for the quarter was $232.1 million, and our adjusted EPS of $0.98 met the high end of our range of guidance. Excluding the onetime tax planning benefit of $0.09 per share in the first quarter last year, our EPS grew by 10.1% from the adjusted $0.89 a year ago. I am extremely pleased with the first quarter performance for our Dollar Tree banner and with the continued progress in rebuilding the Family Dollar business. For the combined banners, total sales were near the midpoint of our range of guidance. Same-store sales were positive for our 37th consecutive quarter. Consolidated gross margin and operating margin rates improved, SG&A expenses across both banners were well managed, and importantly, our adjusted EPS met the high end of our range of guidance at $0.98 per diluted share. Performance of the Dollar Tree banner continues to be strong and consistent. Same-store sales increased 2.5%. Sales mark-on, including freight expense, improved; shrink declined; and our sector-leading operating margin grew 50 basis points to 12.3%. Our Dollar Tree merchants and operators continue to raise the bar for sales and profitability. At Family Dollar, our customers are seeing cleaner stores, better product assortments, greater values, more consistent in-stocks and an elevated level of customer service. I'm confident that each of these elements over time contributes to winning back repeat visits and share of wallet. But that's just the beginning. We are in the early stages with many of our key initiatives that are expected to bring continued improvement. Our re-merchandising and renovation programs have just begun as we enter second quarter, and we're confident that our customers will be thrilled with the merchandise energy and excitement in our stores as these initiatives gain traction.
Our strategy is consistent and increasingly relevant:
to deliver great values and convenience to our shoppers every day. With more than 6,400 Dollar Tree and more than 8,000 Family Dollar stores, we have the unique opportunity in value retail to serve more customers through all types of markets. I believe we are in the most attractive sector in retail. Shoppers today are focused on value and convenience now more than ever. And that's exactly what Dollar Tree and Family Dollar store provide
Our real estate and finance teams recently completed a rigorous analysis assessing the current store opportunity for each of our banners. As a result of their efforts and analysis, we're now confident in our opportunity to operate more than 10,000 Dollar Trees and more than 15,000 Family Dollars across the United States. With a combined store count currently of approximately 14,200 stores in the U.S., we have many years of growth opportunity ahead. In addition to opening more stores, we're keenly focused on increasing the productivity of all of our stores. By leveraging our buying and operational synergies across banners, we have continued opportunity to increase sales, improve margin and manage expenses. With a keen focus on the customer, our goal is to maintain relevance in the market, offer extreme merchandise value and convenience while operating stores with a full, fun and friendly shopping experience. We plan to operate and grow both banners. At Dollar Tree, everything is $1. Family Dollar is your neighborhood discount store. We have the opportunity to serve customers with one or the other or both banners, depending on the market and customer demographics. Our Dollar Tree Canada business continues to perform extremely well. Our merchant and store teams in Canada are doing a terrific job in managing their business. Their efforts in serving our Canadian customers are resulting in annual improvements in store productivity. Comp sales in our Canadian stores outpaced our company average in the first quarter, driven by increases in both average ticket and customer count. Leveraging the size and scale of Dollar Tree, our merchants continue to source higher-value product, and our customers are finding broader, more exciting assortments and better values in Dollar Tree Canada stores. We want to be recognized by customers as the leading retailer in Canada at the single price point of CAD 1.25, just as we are in the United States at the $1 price point. We now operate 225 stores in Canada and believe we have an opportunity for 1,000 stores over time. In addition to Dollar Tree, Family Dollar and Dollar Tree Canada, our online business at Dollar Tree Direct is growing in size and performance. Dollar Tree Direct provides an opportunity to broaden our customer base, to drive incremental sales, expand brand awareness and attract more customers into our stores. While Dollar Tree Direct is a relatively small component when compared to our overall business, I continue to be very pleased with the year-over-year trends we are seeing in both traffic and sales, and we're seeing a material increase in the number of visits from mobile devices. We strive to run world-class stores and engage with our customers via conventional and digital marketing channels such as e-mail, Facebook, Pinterest how-to craft videos, Twitter and more. I invite you to check us out at dollartree.com. In April, we announced the location for Dollar Tree's 12th distribution center. It will be in Warrensburg, Missouri, less than 60 miles southeast of Kansas City. We plan to break ground soon on our new 1.2 million-square-foot facility, which will be operational by the end of second quarter 2018 and will support our continued store growth in the Midwest. This $110 million project will create approximately 375 jobs for Johnson County, Missouri and surrounding communities within 3 years. Now I'll turn the call over to Gary to provide more detail on our performance and our priorities.
Gary Philbin:
Thank you, Bob. Good morning, everyone. We're pleased with our overall performance for the first quarter as we met the top end of our EPS guidance range. While we know we're certainly capable of doing better, the retail environment was dynamic, and we saw a number of factors impact our business. This included delays in tax refunds and a shift in the timing of Easter. We continue to focus our efforts to achieve continuous improvement and drive our key business initiatives that are aligned to deliver a better in-store shopping experience, top line sales growth, margin enhancement and effective cost management.
For the quarter, our enterprise same-store sales increased by 0.5%. For the Dollar Tree banner, total sales in Q1 increased 7.9% to $2.57 billion, and same-store sales increased 2.5%. This was achieved through increases in comp transaction count and average ticket. Gross profit margin improved 50 basis points over Q1 last year, and first quarter operating margin was 12.3%, an improvement of 50 basis points over last year's 11.8%.
Dollar Tree highlights for the quarter include sales in the top-performing categories:
snacks and beverage, candy, toys, seasonal products and health care products. Sales performance was led by our consumables line of business, and both consumables and discretionary comped positively for the quarter. As we expected, April, which benefited from the Easter shift, was the strongest same-store sales of the quarter.
Geographically, Dollar Tree same-store sales growth was strongest in the Midwest, Northeast and Southwest. And each of our operating zones delivered positive comps greater than 1%. The Dollar Tree business continues to be strong, consistent and growing. This represented our 37th consecutive quarter of positive same-store sales, and our operating margin continues to lead the value sector. Our first quarter performance continues to validate the relevance of the Dollar Tree brands. Customers continue to shop for value and convenience. For the Family Dollar banner, total sales increased 0.5% to $2.72 billion, and same-store sales decreased 1.2%. The first quarter represented our toughest prior year comp comparison we will face in 2017. On a 2-year stack basis for the first quarter, comps were positive for the Family Dollar banner. Gross profit margin declined 30 basis points to 26.9%, and operating margin was 4.6%.
For Family Dollar, the highlights for the quarter include the sales in our top-performing categories:
snacks and beverage, health and beauty care and men's apparel. Our comp performance was driven by consumables, which comped positively slightly in the first quarter.
Timing of sales through the first quarter was impacted by various factors, including the material delays in the timing of tax refunds, a later Easter holiday and cycling of the SNAP benefit reductions from 2016. As a result, our comps by month varied from mid-single-digit negative for February to mid-single-digit positive for April. Geographically, Family Dollar same-store sales growth for the quarter was relatively balanced, with the West, Mid-Atlantic and Mountain West zones being the strongest.
Less than 2 years into our integration, we continue to make meaningful progress at Family Dollar around the key foundational elements that will drive performance:
our store table stakes, our focus on merchandising value and the consolidation of shared services.
Our efforts are focused towards our customer-facing initiatives that our shoppers continue to give us credit for, and we are working to improve and scale these across all 8,000 stores. Our customers are seeing cleaner, better-merchandised stores that have more compelling end caps with products they need for everyday basics and holiday wants. And while we have more to do at Family Dollar, we are on the right track with our continued investment in the basics of our Family Dollar banner. These customer-facing programs to drive and show value throughout the store continue to lead the momentum for our Smart Ways to Save marketing program. Our customers continue to respond to the value and savings across all of these elements, delivering value for our Family Dollar customer. Our Smart Ways to Save messaging reflects the values and the execution of the merchandising in our stores. This includes our EDLP pricing on everyday value; sale items that reflect most meaningful value on key items; $1 Wow that drives the surprise in opening price point throughout the store; Compare and Save to shout out the excellent value of our private brands; Price Drop, great value on the items our customers buy most often; and Smart Coupons, the easy way to find additional savings. We believe our customers are giving us credit across the store on our Smart Ways to Save and that gives us flexibility to drive value and convenience for our customers filling the shopping truck. In particular, our customers are continuing to respond and embrace Smart Coupons, with more than 2.5 million customers enrolled since our Labor Day 2016 kickoff. For our regular shoppers, this program provides a no-hassle shopping experience to find national and Family Dollar exclusive offers. We are seeing a measurable lift in average ticket for the transactions where a Smart Coupon has been applied. For Family Dollar, it's a great way for us and our suppliers to reach a customer demographic that is uniquely served by Family Dollar. It enhances the delivery of our Smart Ways to Save message. Over the past 18 months, we've invested a significant amount of time, test-and-learn effort to improve our Family Dollar store layout. We are pleased with the results we are seeing. And now this is the format we will be utilizing for both our new stores and current renovation program. We believe our customers will respond enthusiastically to this format as we roll it out in the months ahead. Elements of the layout include improved adjacencies and more productive end caps; expanded beverage and snack, 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 efficient power alley to promote $1 Wow items; and a faster checkout process for the customer. Our first renovations have started in earnest in Q2, and we look forward to making progress on our target of 250-or-more renovations this year. As performance becomes measurable and predictable, we have the ability and intention to ramp up accordingly. Most new stores will now open with our assortment and adjacencies that reflect our latest thinking of our new format. Another key element of driving improvement in the Family Dollar business is the development of our private brand program. We are in the process of moving away from family-branded labels such as Family Wellness, Family Gourmet and Family Chef, with the intention to drive relevant brand names with new and improved packaging to refresh our assortments. Some of these examples in our stores today, you will see HOMELINE replacing the Family Dollar brand in household products. You will also see we're transitioning from our private-brand candy assortment from Family Gourmet, where you will now see Catawba Candy Company. In the months ahead, we'll be transitioning labels in several other product lines mainly in the consumables categories. These private brands are being developed to provide national brand comparable quality and terrific values to support the Compare and Save component of our Smart Ways to Save program. Each of our brands will contain 100% customer satisfaction guarantee. We look forward to providing you updates on our progress in the quarters ahead on this important program. While we have more to do, our team at Family Dollar is motivated and energized to be the best at delivering value to our shoppers that are unique in many ways and often underserved. Our stores serve a customer that counts on us and responds when we deliver value, convenience for quick trips in a small format and a Family Dollar shopping experience that backs up our promise of friendly service.
Now looking at real estate in the first quarter. We opened a total of 164 new stores:
89 Dollar Trees, 75 Family Dollars. We relocated or expanded 51 stores
I will now turn the call over to Kevin to provide more detail on our first quarter performance and our outlook for Q2 and the full year. Kevin?
Kevin Wampler:
Thank you, Gary. I would like to remind everyone that our discussion, as previously noted, excludes the effect of the $0.13 per share receivable impairment charge, unless otherwise noted.
Total sales for the first quarter grew 4% to $5.29 billion. Dollar Tree segment total sales increased 7.9% to $2.57 billion, and Family Dollar segment total sales increased 0.5% to $2.72 billion. Enterprise same-store sales increased 0.5%. 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 2.5% and, for the Family Dollar banner, decreased 1.2%. As expected, we experienced incremental cannibalization from Family Dollar and Deals stores that have been converted to Dollar Tree stores. We estimate the incremental cannibalization impact to the Dollar Tree banner comp to be approximately 30 basis points for the quarter. Gross profit for the combined organization increased 4.7% to $1.63 billion for the first quarter 2017 compared to the prior year's quarter. As a percent of sales, gross profit margin improved 20 basis points to 30.8% versus 30.6% in the prior year's quarter. Gross profit margin for the Dollar Tree segment was 34.9% for the first quarter, a 50 basis point improvement compared with the prior year's first quarter. Factors impacting the segment's gross margin performance during the quarter included lower merchandise costs, favorable freight costs and lower shrink as a result of favorable inventory results, partially offset by higher distribution and occupancy costs as a percentage of net sales, resulting primarily from the -- from our Cherokee County, South Carolina DC opening in Q2 of last year. Gross profit margin for the Family Dollar segment was 26.9% during the first quarter compared with 27.2% in the comparable prior year period. The 30 basis point decrease was primarily due to higher markdown and shrink expense in the quarter, partially offset by improved merchandise costs. Consolidated selling, general and administrative expenses as a percentage of net sales in the quarter increased to 22.5% from 22.3% in the same quarter last year. Q1 SG&A expense for the Dollar Tree segment as a percentage of sales was consistent when compared to the prior year's quarter at 22.6%. Higher store payroll costs and stock compensation were offset by lower health insurance costs, lower store supply and professional fees as a percentage of sales. SG&A expense for the Family Dollar segment as a percentage of sales was 22.3% compared to 22.1% in the prior year's quarter. The increase was a result of higher payroll costs resulting from loss of leverage from the comp sales decrease and higher advertising costs, partially offset by lower depreciation costs and lower store repairs and maintenance costs. Operating income for the enterprise increased to $439.7 million compared with $418.7 million in the same period last year. Operating income margin increased to 8.3% for the quarter from 8.2% in last year's first quarter. Operating income margin for the Dollar Tree segment improved 50 basis points to 12.3% when compared to the prior year quarter. Operating income for the Family Dollar segment decreased $13.7 million to $124.3 million, a 50 basis point decline as a percentage of sales when compared to the prior year's quarter. Nonoperating expenses for the quarter totaled $75 million, which was comprised primarily of net interest expense. Our effective tax rate for the first quarter was 36.1% compared to 29.8% in the prior year's quarter. Prior year's quarter included a onetime benefit related to state tax planning. For the first quarter, the company had net income of $232.1 million or $0.98 per diluted share compared to the reported net income of $232.7 million or $0.98 per diluted share in the prior year's quarter. The prior year included a $0.09 onetime benefit to EPS from a lower-than-anticipated tax rate, as previously noted. Excluding the $0.09 onetime benefit from the prior year quarter, diluted earnings per share improved 10.1% from the adjusted $0.89. Combined cash and cash equivalents at quarter end totaled $1.15 billion compared to $866.4 million at the end of fiscal 2016. Our outstanding long-term debt is approximately $6.3 billion. Inventory for the Dollar Tree segment at quarter end was essentially flat to the same time last year, while selling square footage increased 6.5%. Inventory per selling square foot decreased 6.1%. We believe that current inventory levels are appropriate to support scheduled new store openings and our sales initiatives for the second quarter. Inventory for the Family Dollar segment at quarter end decreased 3% from the same period last year and decreased 4.2% on a selling-square-foot basis. We continue to be pleased with the progress we are seeing in our in-stock levels on key items. We are continuing to review merchandise assortments and believe our current inventory levels are appropriate from the second quarter. Capital expenditures were $110.3 million in the first quarter 2017 versus $175.9 million in the first quarter last year. For fiscal 2017, we are planning for consolidated capital expenditures to range from $760 million to $780 million. Capital expenditures will be focused on new stores and remodels, including fee development stores; renovating 250 Family Dollar stores in 2017; the addition of frozen and 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; start-up construction of our 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 $153.9 million for the first quarter. Depreciation and amortization expense was $162.3 million in the first quarter of last year. For fiscal 2017, we expect consolidated depreciation and amortization to range from $610 million to $630 million. Our updated outlook for fiscal 2017 includes the following assumptions. Fiscal 2017 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 states increasing minimum wages and general average hourly rate increases. We have budgeted higher import freight costs than a year ago, starting in Q2, and higher diesel costs for the year. Net interest expense will be approximately $75 million per quarter in Qs 2 and 3 and approximately $81 million in Q4 due to the extra week. Our guidance does not include any share repurchase for 2017. And we cannot predict future currency fluctuations, so we have not adjusted our guidance for changes in currency rates. Our guidance also assumes a tax rate of 36% from the second quarter and 36.5% for fiscal 2017. Weighted average diluted share counts are assumed to be 237.7 million shares for both Q2 and the full year. For the second quarter, we are forecasting total sales to range from $5.18 billion to $5.28 billion and diluted earnings per share in the range of $0.80 to $0.88. This represents an increase of 11% to 22% over the $0.72 reported EPS for Q2 last year. These estimates are based on a slightly positive to low single-digit same-store sales increase and year-over-year square footage growth of 3.4%. For fiscal 2017, we are now forecasting total sales to range between $21.95 billion and $22.25 billion compared to the company's previously expected range of $21.94 billion to $22.33 billion. The company now anticipates diluted earnings per share for fiscal 2017 will range between $4.17 and $4.43, which includes the $0.13 receivable impairment charge. Excluding the $0.13 impairment charge, the top of the guidance range is consistent with our prior guidance. These estimates are based on a slightly positive to low single-digit same-store sales increase and 3.9% square footage growth and includes the benefit of the 53rd week occurring in Q4 fiscal 2017. I'll now turn the call back to Bob.
Bob Sasser:
Thanks, Kevin. Again, I'm extremely pleased with another terrific first quarter performance at Dollar Tree, and I'm equally enthusiastic about what lies ahead of us at Family Dollar. The teams have worked incredibly hard at rebuilding the foundation for a very successful and profitable business. I believe that we are well positioned in the most attractive sector of retail to deliver continued growth and increased value for our long-term shareholders.
Dollar Tree is now a diversified combination of a 6,000-store chain and an 8,000-store chain, each with its unique ability to effectively serve more customers through all types of markets. With the combination of these 2 great brands, we have great flexibility in how we choose to grow while expanding our opportunity to grow. We will continue to focus on providing greater values to our customers while delivering superior returns to our long-term shareholders. The Dollar Tree business model continues to grow and improve. It's powerful, flexible and more relevant than ever, providing extreme value to customers while recording record levels of sales and earnings. While our price point has remained the same, $1, for the past 30 years now, our operating margin continues to grow and lead the discount sector. As always, we will continue to employ a thoughtful, disciplined approach to driving key strategic initiatives to the combined enterprise through improved communication, analysis, collaboration and incentives. Most importantly, we will maintain a laser focus on the customer, maintaining relevance to their needs and, above all, delivering value, convenience and a full, fun and friendly shopping experience. Our fundamentals have been tested by time and validated by results. We are confident that continuing to place our emphasis in these areas can materially enhance the operating performance of Family Dollar, with improvements in sales, margin, expense control and greater customer satisfaction. Through good times and difficult times in all retail cycles, consumers are looking for value and convenience no matter the state of the economy. At Dollar Tree and Family Dollar, we have both. It all starts with our associates. Our merchandise teams and our field management and leadership teams are talented, experienced, energized and incredibly motivated. It's a great time to be Dollar Tree. Operator, we are now ready for questions.
Operator:
[Operator Instructions] We'll take our first question from Alan Rifkin with BTIG.
Alan Rifkin:
Bob, could you maybe just provide an update on where you are with respect to synergies now that you're almost 2 years through the acquisition? I recall your original guidance being $300 million, and even just last quarter, you said you remained comfortable with that number. Could you please give us an update there?
Bob Sasser:
Well, absolutely, Alan. We are confident with the $300 million that we have guided to. We feel very -- we feel like we're squarely in the zone where we need to be at this time. As you remember, there was $300 million run rates spread synergies by the end of the third full year with an investment of $300 million to achieve those. So I can tell you that we are right on target to achieve the $300 million.
Alan Rifkin:
Okay. And could you just tell us, the Missouri DC that will be added, will that emulate the St. George DC, which was fulfilling both banners? And now that you've had some time to take a look and evaluate St. George, what's the prognosis for further DCs supporting both banners, which I believe would give you significant supply chain savings?
Bob Sasser:
Alan, it's another good question. The Missouri DC will -- we will be using Catalyst, which is the WMS that we use in our Family Dollar DCs. It's also the one that we modified in St. George, Utah in order to ship both banners. So we're taking the modified version of the St. George WMS, and we're going to open the new Missouri DC with that WMS. That will be our go-to WMS as we open and continue to expand or convert distribution centers as we go forward.
Operator:
And we'll take our next question from Michael Lasser with UBS.
Michael Lasser:
After you've put in all the hard work with Family Dollar to have cleaner stores, just in in-stock, elevated levels of customer service, surely, you didn't expect to comp down 1.2% this far into your experience with this business. Why do you think it's not better than it is?
Gary Philbin:
Michael, this is Gary. I think the tale of Q1 really speaks to a bit of what happened in the marketplace, especially on the tax refund. So just to give a little color, obviously, everyone knows the tax refunds were delayed. In particular, the earned income tax credit was delayed to the week of the 27th. In fact, you could see by day when it actually hit. And so when you take a look at the quarter, period 1, the month of February, not only was impacted by the -- really the discretionary piece of the business that our customers sort of wait on to get that tax refund to spend what really becomes a capital investment for them, and that was delayed until really the last week. And while we saw that pop, compared to a year ago, that was probably a 2-week shift and go back 2 years, and really, it was the entire month of February. As we went through March, with the -- even with the shift in Easter, we were on track with where we thought sales would be for March. And I think Easter at Family Dollar was in the target zone, too. So as we got back to a regular cadence, we could see our customer respond. So clearly, we're never happy when we see a negative comp, but what we could measure, quantify and see both across just top line sales and as you go down to the lines of business was this delay in the earned income tax credit that our customer experienced in the month of February. I don't think it's anything structurally different with the business. We continue to invest, I think, in the right things in our business, invest in cleaner stores, get exciting merchandise on end caps and on the front end of the stores, give our folks a reason to drive comp store sales. Those are the things that we're going to build over the long run that's going to drive the business. So we are very focused as we go into May and the second quarter. Business is back to focused on what's going to happen in the summer season. And for Family Dollar, that means grow out. For Dollar Tree, that means we're in the midst of just passing Mother's Day. Graduations are in full bloom. Memorial Day's ahead of us. We have the right product in the store to drive Q2 business, and we're focused on doing that across both banners.
Michael Lasser:
My follow-up question is, first, do you think the Easter shift -- and can you quantify how much the Easter shift contributed to the mid-single-digit comp that you experienced at Family Dollar in April? And now that we're -- now that the SNAP drag from last year has been anniversary-ed, do you think that's causing some improvement in the business that should continue into the second quarter and beyond?
Gary Philbin:
Michael, I missed the second part of the question. Was it...
Kevin Wampler:
Cycling SNAP drag.
Bob Sasser:
Cycling SNAP.
Gary Philbin:
Thank you. Well, the first part, I think Easter -- listen, a later Easter helps Dollar Tree tremendously and Family Dollar. Not only is it the Easter holiday. It really becomes the kickoff to spring. So while we haven't quantified it for the enterprise, both banners had a better Easter than a year ago because of just warmer spring weather. And at Family Dollar, that also means some of our other categories outside of pure Easter, apparel, health and beauty, responded the right way. Secondly, on SNAP benefits, it -- I've told you before, at Family Dollar, I view it as sort of the canary in the mineshaft. Listen, it's a small piece of our business. To me, it gives us a great every first of the month, how we're doing. And while we know the benefits have left the market at the Family Dollar banner, we've seen it hold consistently to last year. At Dollar Tree, penetration's down a little bit, but I think that speaks to a little more of Dollar Tree was doing first of month and getting ready for it. And at Family Dollar, that's really been our focus now. So I think it shows up in our SNAP benefits, and it gives us confidence that we're getting ready on first of month in a better way across our stores. They have -- it's spread out by state differently, but those first 10 days are still so important for our Family Dollar customer, getting ready, being in stock and having our folks ready to give great service.
Operator:
Our next question comes from Stephen Tanal with Goldman Sachs.
Stephen Tanal:
I guess my -- I'd be most focused to start on the Family Dollar margin rate. And I'd be curious to know kind of how you're thinking about both the level in Q1 and how the year-on-year should trend over the balance of the year. And then any comments maybe on the longer-term levels that are achievable in that business would be helpful.
Gary Philbin:
Let me start off, Stephen. Q1 was -- besides the sales and the items that impacted us a year ago, we were coming out of our cleanup of inventory. We got the benefit of both the fact that we started off with great shrink at the beginning of 2016. We've just cleaned up a lot of the dribs and drabs that had accumulated in-store. We also came out of the wintertime with -- basically cleaned up in a nice way on apparel, too. So what you saw on some of the margin piece is just maybe back to a normal cadence, it can always do better, but a normal cadence of where we are on shrink and our markdowns in Q1. But again, the one thing that was really different in period 1, because of the tax refunds being late, was the mix shift and the impact on what our customer buys. Our consumables were slightly positive for the quarter. They bought what they needed to get by. The difference of what they wanted to buy across the discretionary departments was really what we felt in period 1 that we could measure that impacted margin in a big way for the quarter. So that was the story for Q1. And I'll let Kevin take a comment on the forecast, but, obviously, we've put everything that we know at this point into our forecast for the balance of the year.
Kevin Wampler:
Yes. So I think consistent on a consolidated basis with what we've said last quarter, if you would look at our range of guidance, the midpoint of our operating income is roughly an 8.8% or an 8.9%, basically, and obviously, that compares to a -- I think about an 8.2% last year. So obviously, we're overall expecting improvement. As part of that, we do expect to see the Family Dollar business, as we go through the year, improve upon where we were in Q1. So I think there is an expectation overall that the business will improve there and as we go forward. So it's had some -- as Gary has mentioned, some various timing things that affected Q1 a little bit more than maybe expected, but we're looking for some better things as we go forward.
Stephen Tanal:
Got it, that's helpful. And then as a -- just as a follow-up, thinking through the synergies and maybe the onetime costs there that are flowing through OpEx, can you give us an update? Was that a net benefit or a net drag year-on-year? And how that'll play out as well?
Kevin Wampler:
Well, I don't know how to speak to it from a drag or a benefit. I think honestly, the costs that we're going to be spending that we're aware of are in our forecast as always, along with the associated synergies that we're expecting this year. So that's no different than any other time. I think from an overall standpoint, we said $300 million to achieve and a little bit more front-end loaded. And again, that was true. If you remember, right, we re-bannered basically 300 stores, 300 Family Dollar stores. We re-bannered 200 Dollar Tree -- or Deals stores to Dollar Tree. So there was a lot of CapEx costs associated with that in the first 1.5 years basically. So that was a big part of it. As I've said before, when we started this process, we said that the $300 million, our best guess was half OpEx, half CapEx. And as I've said, as we went through this, it's probably been a little bit more CapEx at the end of the day and a little less OpEx. But again, still within our targeted range of what we've expected from the beginning from an achievement standpoint as well as a cost to achieve.
Operator:
[Operator Instructions] Your next question comes from Vincent Sinisi with Morgan Stanley.
Vincent Sinisi:
You said earlier in the call that you feel like you've gotten kind of the -- basically the [ dove ] format for Family Dollar in place now that you'll kind of use going forward. Can you just give us a sense for, do you think that in terms of the pricing versus competition, you feel like you kind of have the majority behind you and that you're in good shape going forward there; of course, tweaks and whatnot, but maybe just around pricing? And then also, just in terms of the buying synergies, any sense for kind of, between the 2 banners, how much overlap there is in there and how much maybe more is to be realized?
Gary Philbin:
Vinny, this is Gary. Let me comment on the pricing. I think, okay, we're in retail, we're going to pay attention on just about a weekly basis. And so clearly, while we're pleased with what the format does because I think it makes some logical adjacencies for our customers to shop at Family Dollar in a more productive and easier way for the customer that shows value, but when it comes to pricing, we still are going to highlight the Smart Ways to Save, which our customer responds to across all the elements I've been talking about. We've got to show great everyday prices on the shelf. We're going to have Price Drop sale items that resonate with them on the things they buy most often. Compare and Save, we're excited about this private-brand redo and makeover because we have a pretty good private brand program, but the values that we can show our customer, and now we're freshening up the labels, we think will go a long way. But the pricing piece will continue to be something we watch now and going through -- it's just the nature of the beast as we make sure that we have the right retails on shelf and gives us flexibility with the Smart Ways to Save, with either through electronic with Smart Coupons or on the shelf. Synergies, I would tell you, the merchants work together on a couple of different elements. One, we basically think about it in 2 ways. One, it's our domestic suppliers, so what we have, maybe about a 10% overlap of -- between SKUs, it's bigger than that when we consider some of the similar items we buy. So aluminum foil might be the poster child, with [ 5 25 ] square feet at Dollar Tree, bigger size for Family Dollar. But I would tell you, on the import side, is also an opportunity that we only cycle through those buying trips 4 times a year. So we get sort of 4 chances to get our integration going and have the merchants talk about what's going to be bought for the following year. So keep in mind, as you're taking a look at some of the import side, the lead time is longer, which starts to show up in the synergy, takes that amount of time for us to review our assortments, buy it, ship it, take it through the holidays, and we revamp and redo for the following season. We'll have more of it. There's certainly more opportunities for us to continue above and beyond what we had targeted to drive synergies. And I would say, as much as anything, reviewing assortments and driving excitement inside the assortment.
Vincent Sinisi:
That's helpful, Gary. And maybe just a fast follow-up. Just now with the Family Dollar format kind of fully in place, any qualitative or quantitative way we should kind of think about footage growth annually by banner, more of the split in there kind of post this year?
Gary Philbin:
We haven't really spoken to that. I would just tell you, maybe what excites us from a customer perspective is the way they shop the store across the categories that we've invested in. I have mentioned immediate consumption, our front end that's more productive, the fact that you can -- party and toys and gift cards are now in similar adjacencies, that a mom who comes into the store can buy newborn infant, toddler apparel next to the diapers. So just some maybe retail 101 items that I think just drive better business and make it easier for our customer to shop.
Operator:
And our next question comes from Joseph Feldman with Telsey Group.
Joseph Feldman:
So wanted to go back also on the Family Dollar business. I guess, can you help us understand when we should start to see the operating margin improvement, I guess, accelerate? I think certainly, there are some out there, including myself, that would have thought that we'd be seeing a little bit better margin improvement, not necessarily gross but just overall operating margin improvement at the Family Dollar business at this point. And I just wanted to get your sense of timing on that.
Gary Philbin:
I think it's a -- Joe, I think a couple of combinations. I think you've heard us talk about the foundational things that we're putting in. We've said we're in this for the long run. And we're going to -- we've done the things that we think get us on the right path for running better stores, better assortments, better value on shelf. I think what we're describing with the renovation program now, is something that's maybe a little bit more visible for our customer to see, which also is going to be one of the engines that helps us drive an overall margin growth. So as we do our 250 renovations this year, as the new stores come out with the new format, now our customer is going to see something in a physical way in a store that's cleaner, fuller, fresher. And that's really another piece to the puzzle here that we've been focused on to say, "Let's change the complexion of the fleet of stores." And that's what you're going to see in the back half of this year. And I'm anxious to get those out of the ground because I think those are the elements that combine with all the things we've been talking about
Joseph Feldman:
Got it, that's helpful to explain. And then just as a follow-up, with regard to some of the clearance activity you're -- or I guess not clearance, but with the rebranding of the private label, I guess, I'm curious how that will impact the clearance of the older inventory and how that's baked into your outlook.
Gary Philbin:
I would say, in most cases, we're just flowing it behind as a -- whether it's the candy or whether it's the trash bags, most of these are consumables. It turns pretty quickly. And while we may have some, it's all baked into our forecast. Most of these are going to flow-throughs with the existing SKU on the shelf being replaced by a new package.
Operator:
And our next question comes from Alvin Concepcion with Citi.
Alvin Concepcion:
Last quarter, I think you mentioned you hadn't seen much change in the past 1.5 years from a competitive promotional environment. Did you see that stability continue into 1Q and further into the second quarter?
Bob Sasser:
Alvin, I think competition's always part of our life. I watch intensely as does our field operators and our merchants and what other -- what the competitors are doing, from a couple of points of view, what are they doing with merchandise mix and businesses that they're driving as well as price, the pricing statements that they're making. So we continue to shop. We see a lot of -- there's a lot of new competition out there or coming in, especially in the grocery business. We're not a grocery store, but we still sell some food, and we sell beverage and snacks and those types of products. So we're watching that intensely. But at the same time, we remain focused on our customer, what our customers' needs are, how do we put together that value equation for our customer. As Gary was speaking at Family Dollar, the -- all the different ways to save with our ad prices and our everyday prices and our price drops, which are surprising price value to our customers. So we're going to stay focused on that. We're going to watch what the competition does. We're going to shop the price on key items, name-brand items as we always have diligently. It's different by market. We pay attention across the country. And we're going to evolve our business based on what our customers need. This new renovation program is just rolling out in second quarter, and we're really excited about it because it does take a lot of the -- it takes all of the components that we've been talking about and testing in different stores and puts them together. So our new stores are starting to roll out with the new adjacencies, with the new mix of product, with the new store designs as well as going back and renovating. Right now, we're seeing 250 stores. Obviously, based on performance, we'll -- we've got our foot on the accelerator if it exceeds expectation, and we certainly would jump all over it. And then the other thing is with that, we roll out the renovations, the things that we find that are really compelling to the customer in those new stores, we still have the ability to roll pieces and parts out to the existing fleet where we know it's going to be a home run. So competition is retail; retail is competition. I have great respect for all of them. We're going to keep watching them. And we're especially going to stay focused on the customer and how they respond to what we offer in our stores.
Alvin Concepcion:
Great. And just a quick follow-up on the comps. It sounds like you're seeing more normalized trends in the second quarter, enough to give you confidence in the annual number. Just wondering if you could give us some more color on what you're seeing in second quarter since there were many issues in 1Q you called out.
Bob Sasser:
Yes. I wish I could tell you exactly, but it's early. So yes, we feel good about our guidance. We have it -- all that we know embedded into our guidance for the second quarter. We have a lot to -- still, we're just early on in the quarter, Mother's Day was good. This weekend is the Memorial Day holiday, and we're expecting big things from that. And of course, graduation, especially in our Dollar Tree business, is a big idea, then heading into Father's Day and beyond. At Family Dollar, it's all those things plus a bigger seasonal summer offering because at Family Dollar, we sell fans. So when it gets hot, we're going to sell lots more fans and beach supplies and coolers and charcoal grills and all the things for cooking out. This should be a big weekend for that as well as the apparel business at Family Dollar. As our weather warms, as we get bright, blue, sunny skies, we're seeing the apparel business take off. So there's a lot of bright spots. And just to step back a minute, I will tell you that the big issue once more in first quarter on sales at Family Dollar was the delay in the tax refund checks. You could -- they were late, and the business was -- in February was stubborn and difficult. But when the check's hit, you could see it day by day, and you could see improvement in the sales. And then we came into March, where we lost Easter, at pretty good marks, and it met our expectations. We had a good Easter, but we could not make up what we lost in February. And that's the story that you see. Our discretionary business is what suffered. Our consumer, the things that they needed, even with a bad -- with getting the checks late, they bought what they needed, so our consumable business was slightly up over the quarter, but our discretionary business is where all of the comp decrease was. So that really is the story of what happened at Family Dollar. It wasn't structural. It wasn't anything to do with our new assortments. It was more to do with just the way things fell on those tax checks, especially for that low-income customer, which we have a lot of at Family Dollar. These tax checks, to those lowest-income customers, they wait for them, they count on them, and that's when they buy things like clothing, and that's when they buy the things that they'd like to have but just can't afford to have other times of the year.
Operator:
We have time for one more question. We'll take that question from Patrick McKeever with MKM Partners.
Patrick McKeever:
I'll just ask a couple of big-picture questions. First of all, on the border-adjusted tax, just wondering, I know it's very iffy as to what happens there, but is that something that you're thinking about? And is there any kind of contingency planning, that sort of thing, around it if it were to come to be? And then second question is, just, Bob, I know the past few conference calls, you've had somewhat cautious comments about the economic well-being of the -- of your core customer. I know that later tax refunds were a big issue in the first quarter, but just thinking about your core customer, do you -- are you still feeling a little cautious? Do you feel like things are getting better there?
Bob Sasser:
Well, to answer that, first of all, the border-adjustable tax is still out there, still being debated in Congress. I was watching last night, night before last, the reruns on C-SPAN of the House Ways and Means Committee and as they were talking to some retailers about the border-adjustable tax and trying to get more facts and frame their position on that. It's still up in the air. It's not -- until we know what it is, we really don't know how to organize around it. I think we're doing exactly what we should be doing, is paying attention to it and trying to understand it as well as where it's going, talking to our congressmen, talking to our senators, working through RILA and the other groups that are out there supporting retail and putting our position forward. So that's what we're doing, and we're -- we've actively been doing that, and we'll see how it goes. I don't want to sit here and prognosticate one way or another what Congress will do. But I think at the end of the day, hopefully, they'll get it right, and we'll have a good result to this. The -- so there are no initiatives going on right now, what if this and what if that. There's too many what-ifs and too many open questions to make anything meaningful right now. So we're doing exactly what we need to be doing right now, Patrick. On the health of the consumer, we serve the lowest consumer up through middle-income consumers. So we serve a broad swath of consumers out there, and I believe what I've said in the past that the -- was that the consumer was under pressure and concerned. I still think that's the case. And I think some of the -- whether it's the economic questions that are out there with health care and health care reform and tax reform and all of the issues that we're working with in Congress, I think all of those had uncertainty. As long as there's uncertainty, then the American consumer is -- they're focused on paying the light bill, they're focused on paying the rent, the house payment, car payment, all the things. Employment, will I have a job? Do I have a job? Until they get confident in their position that they do have a job and that they can pay the bills, there's going to be -- continue to be uncertainty. At Dollar Tree and at Family Dollar, we work hard every day to be one of the answers to their issues. As they strive to balance their budgets, as they try to take their paycheck and spread it across the month or the week or whatever the pay cycle is, we want to be part of the solution to their issues. We want to help them balance their budget by having the things they want at great prices, great value, surprising value. And at Dollar Tree, you can splurge because everything is still $1. Yes, you can afford it at Dollar Tree. You can go in and you can have a great party, birthday party for the kids and for the family, buy your seasonal product and still pay only $1.
Operator:
And that concludes today's question-and-answer session. Mr. Guiler, at this time, I will turn the conference back to you for any additional or closing remarks.
Randy Guiler:
Great. Thank you, Christina. 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 Q2 results are tentatively scheduled for Thursday, August 24, 2017. Thank you, and have a good day.
Operator:
This concludes today's call. Thank you for your participation. You may now disconnect.
Operator:
Good day, and welcome to the Dollar Tree fourth quarter earnings conference call. Today's call is being recorded.
At this time, I'd like to turn the conference over to Randy Guiler, Vice President, Investor Relations. Please go ahead, sir.
Randy Guiler:
Thank you, Melanie. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the fourth quarter and fiscal year 2016. Participating on today's call will be our CEO, Bob Sasser; our CFO, Kevin Wampler; and our 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 Current Report on Form 8-K, Quarterly Report on Form 10-Q and Annual Report on Form 10-K, which are all on file with the SEC. We have no obligation to update our forward-looking statements, and you should not expect us to do so. At the end of our prepared remarks, we will open the call for questions. [Operator Instructions] Now I will turn the call over to Bob Sasser, Dollar Tree's Chief Executive Officer.
Bob Sasser:
Thanks, Randy, and good morning, everyone. As you know, this morning, we announced our results for the fourth quarter and full year fiscal 2016. Enterprise total sales for the fourth quarter increased 5% to $5.64 billion, and same-store sales, which now includes our Family Dollar segment, on a constant currency basis increased 1.2%. Adjusted for the impact of Canadian currency fluctuations, the same-store sales increase was 1.3%. By segment, same-store sales for the Dollar Tree banner increased 2.3% or 2.4% when adjusted for Canadian currency fluctuations, and for the Family Dollar banner, same-store sales increased 0.2%.
Our gross margin rate improved 130 basis points to 32.1%. We leveraged our total SG&A expense by 30 basis points. Operating income increased 24.9% to $586.5 billion (sic) [ $586.5 million ], and our year-over-year operating margin for the quarter improved from 8.8% to 10.4%. Net income for the quarter increased 40.5% to $321.8 million, and our earnings per share were $1.36. This represents a 40.2% improvement from the fourth quarter a year ago and exceeded the high end of our guidance range by $0.03 per share. This was a very solid quarter across both banners. Total sales were near the midpoint of our range of guidance. Same-store sales were positive in both Dollar Tree and in Family Dollar. Gross margin rate and the operating margin rates improved, and SG&A expenses across both banners were well managed. Operating margin improved 160 basis points to 10.4% for the quarter, and importantly, our EPS exceeded the top end of our range of guidance. We're pleased with our progress on the integration of our Family Dollar business, and we remain on track to deliver at least $300 million in run rate synergies by the end of the third year post acquisition. There's still much more to be done, and we continue to believe we will ultimately surpass our 3-year target. Our strategy remains unchanged, to deliver great values and convenience to our shoppers every day. With the combination of our complementary brands, Dollar Tree and Family Dollar, we have unparalleled opportunity in value retail to serve more customers in all markets. We believe we are in the most attractive sector in retail. Shoppers today are increasingly focused on value and convenience, and that's exactly what Dollar Tree and Family Dollar stores provide, value and convenience. Looking forward, our banners are positioned for increased relevance to our customers, sustained growth and improved profitability. We have multiple opportunities to continue growing and improving our business. We're opening more stores. In fiscal 2016, we opened 584 new stores, and in fiscal 2017, our plans include opening 650 new stores. Additionally, we are keenly focused on increasing the productivity of all of our stores. We see continued opportunity to increase sales, improve gross margin and better manage the cost structure within each of our banners through our continued focus on the customer, our drive-to-business initiatives, timely category reviews, new items, category expansions, shared services and just running great stores, full, fun, exciting stores. Dollar Tree Canada continues to be a key brand in our portfolio and an important component of our growth strategy. I'm extremely proud and pleased with the progress made by our merchant and store teams in Canada. Their continued efforts to serve the Canadian customer are delivering higher store productivity each year. Comp sales momentum continued into fourth quarter, driven by increases in both average ticket and customer count. Leveraging the buying power of Dollar Tree, our merchants continue to source higher-value product, and our customers are finding broader, more exciting assortments and better values in Dollar Tree Canada stores. Our goal is to be recognized by customers as the leading retailer in Canada at the single price point of CAD $1.25, just as we are in the U.S. at the $1 price point. We now operate 226 stores in Canada and believe we have an opportunity for 1,000 stores over time. In addition to Dollar Tree, Family Dollar and Dollar Tree Canada, our online business at Dollar Tree Direct is growing in size, performance and importance. Dollar Tree Direct provides an opportunity to broaden our customer base, drive incremental sales, expand brand awareness and attract more customers into our stores. While Dollar Tree Direct is a relatively small component when compared to our overall business, I continue to be very pleased with its year-over-year growth. As retailers in the digital age, we plan to engage with our customers wherever and however they prefer. We strive to run world-class stores, deploy world-class digital mediums and engage with our customers via conventional and digital marketing channels, such as e-mail, Facebook, Pinterest, how-to-craft videos, Twitter and much more. Whether customers prefer to contract Dollar Tree Direct via their phones, their pads, their laptops or their desktops, we're ready and able to connect with them. We continue to be very pleased with the growth of both sales and visitors to our Dollar Tree Direct business. Please check us out at dollartree.com. Now I will turn the call over to Gary to provide more detail on our performance and our priorities.
Gary Philbin:
Thank you, Bob, and good morning, everyone. As Bob commented, we're pleased with our performance in the fourth quarter, but we know we're still capable of doing better. We operate in an environment of continuous improvement and drive the key business initiatives that focus on delivering better in-store shopping experience, top line sales growth, margin enhancements and cost reduction.
For the quarter, our enterprise same-store sales increased by 1.2%. Highlights for the Dollar Tree banner include:
total sales in Q4 increased 7.9% to $2.9 billion; same-store sales on a constant currency basis increased 2.3%. This is achieved through increases in both traffic and average ticket; gross profit margin improved 110 basis points over Q4 last year; and fourth quarter operating margin was 16.4%, an improvement of 140 basis points over last year's 50%; and Dollar Tree's operating margin for the full year in 2016 grew 130 basis points to 12.9%, a new record for Dollar Tree.
To share some of the highlights on the quarter, our top-performing categories for the Dollar Tree banner include candy, seasonal, party supplies, snacks and beverages, toys and household products. Sales performance was balanced between both our discretionary and consumables. We delivered positive same-store sales each month throughout the quarter. November, which benefited from the Halloween shift, was our strongest comp month. And geographically, Dollar Tree same-store sales growth for the quarter was very balanced as each of our operating zones delivered positive comps that exceeded 1%. The Dollar Tree business continues to be strong, consistent and growing. This represented our 36th consecutive quarter of positive same-store sales and a full year operating margin that is historically one of our highest. Our fourth quarter results validate the relevance of the Dollar Tree brand. Customers continue to shop for value and convenience.
Highlights for the Family Dollar banner in the fourth quarter included:
a total sales increase of 2.2%; a same-store sales increase of 20 bps; average ticket was up 30 bps and traffic was down slightly; gross profit margin improved 110 basis points over last year; and operating margin was 4%, an improvement of 160 basis points over the prior year quarter.
Our Family Dollar highlights for the quarter. Our top-performing categories for the Family Dollar included electronics, snacks and beverage, candy, men's apparel and cough and cold supplies. Our comp performance is driven by consumables. We delivered positive same-store sales in both November and January. November, of course, which benefited from the Halloween shift, was our strongest comp month. And geographically, Family Dollar same-store sales growth for the quarter was relatively balanced with our West and Northeast operating zones being the strongest.
We are now 18 months into our integration, and we continue to make progress at Family Dollar around the key foundational elements that will drive our performance:
store table stakes, focus on merchandising value and consolidation of shared services.
Our efforts continue to be around customer-facing initiatives that our shoppers continue to give us credit for as we work to improve these across our base of 8,000 stores. Our customers are seeing cleaner, better merchandised stores that have more compelling end caps with price they need for everyday basics and holiday wants. While we have more to do here, we're on the right track with our continued investment in the basics of our Family Dollar banner.
These customer-facing programs to drive and show value throughout the store continue to build momentum across our Smart Way to Save marketing program. Our customers continue to respond to the value and savings across all of our foundations on delivering value for our Family Dollar customer. The Smart Way to Save strategy connects the values in our ad to the merchandising in our stores:
EDLP pricing on our everyday value; sale items that reflect the most meaningful value on key items; our dollar wow items that drives the surprise in opening price point throughout our stores; compare and save to shout out our excellent value of our private brands; price drop; great value on the items our customers buy most often; and most recently, smart coupons, the easy way to find additional savings.
Our customers are continuing to respond and embrace our smart coupons with sign-ups exceeding our projections since our Labor Day kickoff. For our regular shoppers, this program provides a no-hassle shopping experience to find national and Family Dollar exclusive offers. For Family Dollar, it's a great way for us and our vendor partners to reach a demographic that is uniquely served by Family Dollar. It enhances the delivery of our Smart Ways to Save messaging.
Another one of our foundational parts of our strategy for success is our focus on table stakes. At a high level, this includes:
our improved store standards and conditions, neat, clean, full and recovered; merchandising relevance and energy, finding what I need at Family Dollar at a value I recognize; and customer engagement. It's our energy around Family Dollar-friendly.
Our customers count on us all month long, but the first 10 days of the month are critical in our efforts to have our in-stocks on shelf recovered and end caps with compelling offers. Our focus here revolves around our efforts to have improved on-shelf in-stocks, along with our operational teams improving our truck-to-shelf process, back to the basics. The convenience of our stores, combined with our focus on improvements across the customer-facing initiatives, is foundational for an improved customer experience at Family Dollar. While we have more to do, our team at Family Dollar is motivated and energized to be the best at delivering value to our customers. They are unique in many ways and often underserved. Our stores serve a customer that counts on us and responds when we deliver value, customer service and a Family Dollar shopping experience that we're all proud of in the neighborhoods we serve. Now looking at real estate in the fourth quarter. We opened a total of 104 new stores, 47 Dollar Trees and 57 Family Dollars; we relocated or expanded 27 stores, 6 being Dollar Trees, 21 Dollar Family Dollars; and we rebannered 8 additional Family Dollars to Dollar Tree, for a total of 139 projects during the quarter. We also added freezers and coolers into 86 Dollar Tree stores during the fourth quarter, bringing our total of Dollar Tree stores with freezers and coolers to 4,788 stores. During the quarter, we closed 55 stores, 15 Dollar Trees and 40 Family Dollars, and we ended the fiscal year with over 14,000 stores, 14,334, 6,360 Dollar Trees, and 7,974 Family Dollar Stores. For fiscal '16, we opened 359 new Dollar Tree stores, 225 Family Dollar Stores for a total of 584, which exceeded our target of 550 new stores during the year.
For 2017, our real estate plans include:
650 new stores, 350 Dollar Tree and 300 Family Dollar Stores; renovations at 250 Family Dollar Stores; cooler and freezer expansions in 300 Family Dollar Stores; and adding freezers and coolers to 400 new and existing Dollar Tree stores. As I've mentioned, we're pleased with our progress, but there is much work and opportunity that lies ahead of us.
I'll now turn the call over to Kevin to provide more detail on Q4 performance and our initial outlook on Q1 and fiscal '17. Kevin?
Kevin Wampler:
Thank you, Gary, and good morning. Total sales for the fourth quarter grew 5% to $5.64 billion. This was at the midpoint of the guidance range of $5.59 billion to $5.69 billion. Dollar Tree segment total sales increased 7.9% to $2.9 billion, and Family Dollar segment total sales increased 2.2% to $2.74 billion.
Beginning in our fourth quarter, the acquired Family Dollar stores are now included in our overall same-store sales. Enterprise same-store sales on a constant currency basis increased 1.2%. Adjusted for the impact of the Canadian currency fluctuations, same-store sales grew 1.3%. On a segment basis, same-store sales increases were 2.3% for the Dollar Tree banner and 0.2% for the Family Dollar banner. As expected, we experienced incremental cannibalization from Family Dollar and Deals stores that have been converted to Dollar Tree stores. We estimate the incremental cannibalization impact to the Dollar Tree banner comp to be approximately 50 basis points for the quarter. Gross profit for the combined organization increased 9.3% to $1.81 billion for the fourth quarter of 2016 compared to the prior year's quarter. As a percent of sales, gross profit margin improved 130 basis points to 32.1% versus 30.8% in the prior year's quarter. Gross profit margin for the Dollar Tree segment was 37.5% during the fourth quarter, a 110 basis point improvement compared with the prior year's fourth quarter. Factors impacting the segment gross margin performance during the quarter included lower merchandise costs due to higher initial mark-on and favorable trade costs and lower markdowns due to the Deals conversions in the prior year. These were partially offset by higher distribution and occupancy costs as a percent of net sales. Gross profit for the Family Dollar segment increased 6.6% to $718.5 million. Gross profit margin for the segment was 26.3% during the fourth quarter compared with 25.2% in the comparable prior year period. Excluding the inventory step-up amortization of $15.9 million in the prior year's quarter, gross profit margin was 25.8% for Q4 of 2015. The improvement was due to lower merchandise, freight and shrink costs, partially offset by higher markdown expense and increased distribution and occupancy costs. Consolidated selling, general and administrative expenses in the quarter improved to 21.7% from 22% in the same quarter last year as a percent of net sales. Q4 SG&A expense for the Dollar Tree segment as a percent of sales improved 30 basis points to 21.1% from 21.4% in the prior year's quarter. Decreases in payroll costs, legal fees, depreciation and advertising were partially offset by increases in store wages and retirement plan contributions. SG&A expense for the Family Dollar segment was $608.1 million and as a percent of sales was 22.2% compared to 22.7% in the prior year's quarter. The improvement was driven primarily by lower payroll costs including incentive comp, stock comp expense, workers' comp insurance and health insurance cost as well as lower legal and depreciation expense. These decreases were partially offset by higher store hourly payroll, advertising and repair and maintenance costs. Operating income for the enterprise increased to $586.5 million compared with $469.7 million in the same period last year. Operating margin increased to 10.4% for the quarter from 8.8% in last year's fourth quarter. Operating income margin for the Dollar Tree segment improved 140 basis points to 16.4% when compared to the prior year, and the operating income for Family Dollar segment increased $45.1 million to $110.4 million, a 160 basis point improvement as a percent of sales when compared to the prior year's quarter. Nonoperating expenses for the quarter totaled $88.8 million, which was comprised primarily of net interest expense and $11.7 million of acceleration of amortizable noncash deferred financing costs related to our debt prepayment made in January. Our effective tax rate for the fourth quarter was 35.3% compared to 35% in the prior year's quarter. For the fourth quarter, the company had net income of $321.8 million or $1.36 per diluted share compared to reported net income of $229 million or $0.97 per diluted share in the prior year's quarter. The current year includes $0.03 of expense for the write-off of amortizable noncash deferred financing costs incurred during the quarter, as previously noted. Looking at the balance sheet and statement of cash flow. Our combined cash and cash equivalents at year-end totaled $866.4 million compared to $736.1 million at the end of 2015. Our outstanding debt is approximately $6.3 billion, a decrease of $1 billion from the prior year-end. Inventory for the Dollar Tree segment at quarter-end was 4.6% greater than at the same time last year while selling square footage increased 6.6%. Inventory per selling square foot decreased 2%. We believe that current inventory levels are appropriate to support scheduled new store openings and our sales initiatives for the first quarter. Inventory for the Family Dollar segment at quarter-end decreased 4.6% from the same period last year and decreased 6% on a selling square foot basis. We are pleased with the progress we're 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 first quarter.
Capital expenditures were $113.2 million in the fourth quarter of 2016 versus $144 million in the fourth quarter of last year. For fiscal 2017, we're planning for consolidated capital expenditures to range from $760 million to $780 million. Capital expenditures will be focused on:
new stores and remodels, including fee development stores; our plans include renovating 250 Family Dollar Stores in 2017; the addition of frozen and 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; and the continued build-out of a new office building for the store support center in Chesapeake.
Depreciation and amortization totaled $155.5 million for the fourth quarter. This includes purchase accounting related costs of $17.9 million for favorable lease rights amortization. Depreciation and amortization expense was $174.9 million in the fourth quarter last year. For fiscal 2017, we expect consolidated depreciation and amortization to range from $610 million to $630 million. This includes $66 million for fiscal 2017 for the amortization of favorable lease rights for the purchase accounting valuation of Family Dollar leases. Before I speak to our assumptions included in our 2017 guidance, I want to outline the onetime or unique items that impacted our 2016 earnings by quarter. In Q1 2016, we had a onetime $0.09 per share benefit in our tax rate related to state tax planning. In Q3 2016, we had a onetime $0.09 per share benefit in our tax rate related to a reduction in state tax rate, which decreased the deferred tax liability related to our trade name and tangible asset. Also in Q3 2016, we incurred $0.09 per share in expenses related to our debt refinancing. And lastly, in Q4 of 2016, we incurred $0.03 per share in expenses related to our debt prepayment. Our initial outlook for fiscal 2017 includes the following assumptions. Fiscal 2017 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 our guidance. For the next 2 quarters, we will continue to experience a higher-than-normal degree of cannibalization to Dollar Tree comps from our rebanner efforts. We expect continued pressure on store payroll based on states increasing minimum wages and general average hourly rate increases. We have budgeted higher import freight costs than a year ago, starting in Q2 and higher diesel costs for the year. Net interest expense will be approximately $75 million per quarter in Qs 1 through 3 and approximately $81 million in Q4 due to the extra week. Our guidance does not include any impact related to FLSA overtime regulation changes, which were postponed last November. Our guidance does not include any share repurchases for 2017. We cannot predict future currency fluctuations. We have not adjusted our guidance for changes in currency rates. Our guidance assumes a tax rate of 37.2% for the first quarter and 37% for fiscal 2017. Weighted average diluted share counts are assumed to be 237.5 million shares for Q1 and 237.7 million for the full year. For the first quarter, we are forecasting total sales to range from $5.26 billion to $5.35 billion and diluted earnings share in the range of $0.91 to $0.98. This compares to a reported $0.98 per diluted share from the prior year's first quarter or $0.89 per diluted share when adjusted for the onetime tax rate benefit of $0.09 per share related to state tax planning. These estimates are based on a flat to low single-digit same-store sales increase and year-over-year square footage growth of 3.9%. For fiscal 2017, we're forecasting total sales to range between $21.94 billion and $22.33 billion and diluted earnings per share in the range of $4.20 to $4.56. These estimates are based on a flat to low single-digit same-store sales increase and 3.9% square footage growth and include the benefit of the 53rd week occurring in Q4 fiscal 2017, as previously noted. I'll now turn the call back over to Bob
Bob Sasser:
Thank you, Kevin. Again, I am extremely pleased with our solid performance for the fourth quarter, and I'm proud of our combined Family Dollar and Dollar Tree teams.
We continue to make meaningful progress with our integration plans. We believe that we are well positioned in the most attractive sector of retail to deliver continued growth and increased value for our long-term shareholders. Dollar Tree is now a diversified combination of a 6,000 store chain and an 8,000 store chain, each with its unique ability to effectively serve more customers through all types of markets. With the combination of these 2 great brands, we have great flexibility in how we choose to grow while expanding our opportunity to grow. We will continue to focus on providing greater values to our customers while delivering superior returns to our long-term shareholders. Recently, I joined our combined merchandise teams on their postholiday overseas buying trip. I was very pleased and encouraged by the results from this trip as we continue to develop business relationships, identify and secure tremendous values, improve our supply chain and quality control while meeting our targeted margin thresholds. We have developed valuable experience and expertise over the years, and we're leveraging this for the benefit of our customers across all banners. In recent months, there's been an inordinate focus on the proposed border adjustment tax. We, like most other retailers, feel that the border tax would result in a significant burden to the consumer, both through reduced choices and higher prices. We're working with the National Retail Federation, Retail Industry Leaders Association and the Americans for Affordable Products group to express our concerns. At this early stage, we cannot answer questions regarding potential impacts until we know what, if anything, is passed.
But I do know that -- this:
for 30 years, Dollar Tree has demonstrated its ability to adapt and react in managing our business effectively. Over the past 30 years, we have seen inflation in all costs, including products, labor, transportation and real estate, and we've been able to successfully maintain our $1 price point, deliver relatively consistent gross margins and still provide tremendous values to our shoppers.
As always, we will continue to employ a disciplined approach to driving key strategic initiatives to the combined enterprise through improved communication, analysis, collaboration and incentives. We're confident that continuing to place our 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. The Dollar Tree business model continues to grow and improve. It's powerful, flexible and more relevant than ever, providing extreme value to customers while recording record levels of sales and earnings. While after 30 years our price point at Dollar Tree stores remains $1, our operating margin continues to grow and leads the discount sector. For the full year 2016, our Dollar Tree operating margin improved 130 basis points to 12.9%. Our model has been tested by time and validated by history. For 36 consecutive quarters, we have delivered positive same-store sales increases. Through good times and difficult times and all retail cycles, consumers are looking for value no matter the state of the economy. In the fourth quarter, total sales increased 5%, enterprise-wide same-store sales increased 1.2% and operating margin improved from 8.8% a year ago to 10.4%. It all starts with our associates. Our merchandise teams and our field management and leadership teams are talented, experienced, energized and incredibly motivated. It's a great time to be Dollar Tree. Operator, we're now ready for questions.
Operator:
[Operator Instructions] We'll go first to Matthew Boss with JPMorgan.
Matthew Boss:
So Bob, on same-store sales, what's the mind-set around including flat at the low end of the flat to low single-digit guide for this year? I guess any change in the competitive landscape? Or any change in the way that you view the Family Dollar productivity opportunity?
Bob Sasser:
Yes. Matt, we're extremely excited about the opportunity productivity increases in Family Dollar and in Dollar Tree. But as we sit here first quarter, looking out across a whole year, we have great confidence in our ability to implement and to execute our initiatives. We have great confidence in our models and our initiatives. Our value retail model is as good as there can be. I believe we're positioned exactly where we need to be as we go into 2017. So it's not a lack of confidence. It's more just it's first quarter, and we're looking out across the year. We're looking at our business. We're looking at some uncertainty out in the economic environment and some fits and starts. So as a result, we put all that together. We put what we know on the page and then we put the uncertainty, and that's how we come up with our guidance. We want to always be fair and measured and make sure that we give you the best information that we can possibly give you. As always, we intend to continue to improve and exceed expectations wherever possible.
Matthew Boss:
That's great. And then just a follow up. At the core Dollar Tree, so roughly 90 basis points of operating margin expansion this year, almost 13% today. How would you rank the margin opportunity from here at the core Dollar Tree banner?
Bob Sasser:
Well, there's still plenty of opportunity. There are some headwinds that we have in our ocean freight and some of the things that Kevin called out, with diesel fuel higher now. But we've always been able to -- as long as we can see it coming, we've always been able to manage around that and always drive our operating margin. As you know, I've always said, we're in charge of our gross margin at Dollar Tree. We go to market with 2 things in mind, and our buyers are looking for the best value for the dollar for the customers at a margin we're willing to accept. So the -- we decide, sometimes it's -- we take the opportunities we find in the market, and we use those to drive sales. Sometimes we take it into our margin, but we're always in control of what we're doing. So I feel really good about our Dollar Tree margin. Again, this is our 30th anniversary. It's 30 years. Everything is $1. Every increasing improvements in the business, still hitting some high watermarks at 12.9% operating margin, and I think we can continue that.
Operator:
And we'll go next to Karen Short with Barclays.
Karen Short:
I'm wondering if you can give an update on kind of where you are on synergies to date and costs incurred to achieve the synergies. And then just an update on whether $150 million is still the right run rate to think about for 2017.
Kevin Wampler:
Yes. Karen, I think -- as we've said, from day one, our expectation is to be able to achieve $300 million and hopefully exceed that at the end of the day, and we kind of broke that out. Yes, we kind of broke it out as $75 million the first year, $225 million by the end of the second year and $300 million by the end of the third year. We think we're right where we need to be, on track, maybe just a little bit ahead. So I think that feels pretty good. The onetime cost to achieve, again, we spoke a little bit to that last quarter. And again, when we originally talked to that, we talked about it being about -- half of that being operational expenses and half of it being capital expenses. I think to this point, it's probably been a little bit more on the CapEx side, again, because of
Karen Short:
Great. And just to follow up on the first quarter guidance. I guess the earnings guidance was a little lighter than consensus. Is there anything just to point to there?
Kevin Wampler:
Yes. I don't know if there's anything specifically to point to. I think as we look at it, a couple of things. One, Q1, from the diesel cost perspective, it is the biggest change quarter-to-quarter. So the diesel cost is about $0.02 of headwind in basically Q1. So that's bigger than it is in any other one. And again, I do want to make sure that people are comparing it to the adjusted number of last year of $0.89 as opposed to what was reported because of the tax benefit of a year ago. But that's probably the biggest thing I would point out is diesel costs. And otherwise, I think, we feel pretty good about the number we've been able to put out there.
Operator:
We'll go next to Scot Ciccarelli with RBC Capital Markets.
Scot Ciccarelli:
You broke into positive comp territory for Family Dollar this quarter. And as you continue to work on improving the store format, the -- updating the merchandise, et cetera, is there anything we should keep in mind as to why that banner may comp negative at some point during the course of the year? Or do you expect it to be kind of stable going forward?
Gary Philbin:
Scot, this is Gary. The way I think about the business is we got to a slight positive comp in Q4, and that was with a core that was positive, both in November and January. As we've made our plans for the year, the foundational things that we're putting in place, running better stores, and that revolves around just having our products in stock, cleaner, fuller. The retail basics that we've been talking about, those are the things that I think start to deliver, year-over-year, better comps for us. Some of the strategic things that we mentioned in the call, core expansion. We'll be starting a renovation program. Those are things that will, over time, shift our fleet of stores from how they operate today to something different in the future. And then maybe the third piece is really around the merchandising and the assortment. So as we think about what a Family Dollar customer needs and wants, those are the longer-term enhancements we'll see as we go through buying cycles, both on imports and our domestic products. So I take a look at the year. And we're a retailer. We're always bullish. We're doing the foundational things that help us stay more consistent with our progress on top line sales and then continue to work very hard on the things that are going to drive margin and cost down in the business to get us to a consistent growth trajectory on operating margin.
Scot Ciccarelli:
And Gary, given some of the competitive commentary, whether it's Walmart, Target, Dollar General, et cetera, do you think there is going to have to be any kind of price adjustments at Family Dollar during the course of the year? Or is that already contemplated in your expectations?
Gary Philbin:
Well, everything we know is in our guidance. I think the current news that everyone's reacting to, clearly it's in the grocery sector. It doesn't mean that we're not on the fringe of that. But a Family Dollar business is driven more by our convenience and controlling our own 4 walls, and those are the things that we're focused on to stay in front of for 2017.
Operator:
And we'll go next to Brad Thomas with KeyBanc Capital Markets.
Bradley Thomas:
I wanted to follow up on the -- some of the Family Dollar questions and hoping you could just highlight a bit more where you think you've made the most progress from a daily execution, blocking and tackling standpoint and where you really want to focus the most in 2017.
Bob Sasser:
Brad, thank you, and I would thank you for the question because it gives me a chance to brag a little bit on our folks who have worked very hard on really just the basics, but the hard work that goes into running our stores. And where are we? Well, we know we're not to the finish line. But I would color it this way, our in-stocks, what our customer sees on the shelf is certainly better than where we started 18 months ago. And our efforts to catch up on some of the deferred maintenance in cleaning and the basics that we need to run a full, clean recovered store are in place. Our operational teams are heavily focused on our consistency of providing that day in and day out. And I commented it on it, but for our customers, it really revolves around are we first-of-month ready at Family Dollar. And that's a very important focus for us to gain consistency with our customer and it tends to show up with our first-of-the-month business and our share of SNAP that we take. And so those are the things that, I would say, we've improved on. We have more work to do across all of those. I am pleased with the efforts our folks are putting towards it. It's going to be one of just the basic table stake foundational initiatives that we stay with for several years, because we will always be able to find a way to improve. As we start to be able to renovate some of our older stores, our customers, store by store, will see something that's different, and that's just as important when we're talking about the stores that serve their neighborhood. So I'm encouraged with where we're at, more to be done, but it's consistent message and focus throughout the organization right now.
Operator:
And we'll go next to Paul Trussell with Deutsche Bank.
Paul Trussell:
Just wanted to inquire about Duncan's hiring, if you can touch on that. And then also, if possible, could you just describe in a little bit more detail maybe the expectations on both comps and margins per banner? So to the extent that, how should we be thinking about comps for FDO versus Dollar Tree? Is it 200 basis points spread between the 2 banners as we saw in the fourth quarter? Perhaps, the thought process over the rest of the year. Or could that spread narrow or widen? And similarly, on margins, is there more opportunity or more pressure at the Tree segment versus FDO?
Bob Sasser:
Paul, this is Bob. I'll take the first part. And in order to answer your question about Duncan, let me take you back to about 18 months ago when we made the acquisition of Family Dollar. At that time, if you remember, there was no President at Family Dollar. The President already -- had already left. I thought that when we made the acquisition that it was extremely important, first day, to have a president in place. Gary Philbin, who had been President -- that had been President at Family Dollar, my partner here for a long time, stepped up and went down -- moved down to Matthews. And on day one, we had a President of Family Dollar in place to lead the team. He's done a terrific job energizing the team, communicating, building the initiatives, getting some traction on the business, cleaning up old inventory, doing all the things to revitalize the marketing campaign and the customer communication. I couldn't be more proud of what Gary has done. But I was still one president short with that combination. And as Gary went down to Matthews, we launched into a national search with a national search company looking for a president, a future president of Family Dollar, and we found Duncan. And I will tell you that Duncan, when we met, I knew that he was exactly the right person for this job. His background, he had consumer products background. He had supermarket background. He had a big time discount store background, and he had demonstrated throughout his career a real ability to build store teams, to build merchant teams, to build an organization and to drive success. So I was real pleased to bring Duncan onboard. Duncan has been down there just a short period of time. But I will tell you, he is -- he's stepping in. He started out running. And if you talk to the folks down at Family Dollar, I think you would hear from them that they really have engaged with Duncan, and he has engaged with them in a positive way. So we're very, very excited about adding Duncan to the management team. In addition, at this point in time, we brought Gary, we elevated Gary to Enterprise President. And as Enterprise President, Gary now has responsibilities for all the customer-facing initiatives, all of merchandising, all the store operations and real estate across both banners. Gary reports to me as does the shared services organizations report to me. So that's the -- that was sort of the trail of how all this began, and we're really pleased to have Duncan onboard. We're also pleased to have Gary in the new role. I let Kevin to speak to the second part of the question.
Kevin Wampler:
From a big picture perspective as regards to comps, obviously, from a Dollar Tree side of the equation, we expect the cannibalization we've seen from the rebanner process to dissipate as we go through Q1 and Q2 and really be pretty much done by the end of Q2. So the back half really shouldn't have any headwinds per se from the rebanners, for the most part. So that's a positive on that perspective. I think on the Family Dollar side, we think it's been a little harder for us to forecast just in general, I would tell you, just from a rhythm standpoint at this point in time. So we take that into consideration. There's been a little bit more variability to the business. Doesn't mean we believe that they're not going to comp positive and be able to be a meaningful contributor at the end of the day. So I think the way we're going to look at it as we go forward is we're going to give you enterprise guidance, and then when we report the quarter, we will break it out and give you the 2 segments as well. So that's how we're thinking about it going forward. From maybe a little bit bigger picture for the year, from a -- speaking to the kind of the moving pieces within our P&L, so to speak, on a consolidated basis. We do expect to see improvement in our gross profit this next year -- or this year we just started, I should say. Really, expect mark-on to continue to improve in both banners. We're going to work to lower our markdowns, as a percent of sales, in our Family Dollar banner. We're going to continue to see a little bit of geography change from the standpoint on the Family Dollar banner, and we talked about this last quarter in the sense of our process where we're getting our coop dollars net and our first costs as opposed to offsetting advertising. So you have a benefit in gross profit. You actually see advertising expense and SG&A go up. But that's kind of a geography difference. And then we know some of those improvements are going to be somewhat offset by the higher freight cost that we've already talked about. But in general, we're expecting gross profit to improve. On the SG&A side, I think there's -- expecting flattish to maybe slight improvement. I think the headwinds are -- in SG&A are going to be the pressure on store wages in both banners. And again, we've got minimum wage increases and just general average hourly rates that are increasing more than what we've seen over the last, probably, 4 or 5 years, realistically. And then as well in SG&A, we do have the advertising that I spoke to. That'll be an increase year-over-year. Somewhat offsetting that then is we will expect lower depreciation, based upon the range I gave this year. The midpoint of that range would be $620 million, which compares to last year's actual of $637 million. So depreciation is actually going lower, so those kind of things. As we look at that then, if you look at our operating income, kind at that midpoint of our guidance, you'd be looking at operating income of approximately 8.8% to 8.9%, which is compared to 8.23% (sic) [ 8.2% ] that we reported on the press release today. So at the midpoint, still nice increase in the overall operating income as we go forward. So those are some of the moving pieces, and the big picture as we move into 2017.
Operator:
We'll go next to Dan Binder with Jefferies.
Daniel Binder:
I just had a follow-up on some of the pricing investment that was asked about earlier. If we look at your Family Dollar results, you've allowed gross margin to go up a decent amount over the last several quarters, and the comps have been slightly negative to slightly positive more recently. And I'm just wondering, philosophically, do you think if you were to take some of that gross margin and reinvest it in price, particularly against the backdrop where many of your competitors are, that you might see better comp results and then benefit from the flow-through on that?
Gary Philbin:
Dan, Gary. I think one of the things you sort of point out with the question is the synergy does give us some flexibility in our sector. We certainly monitor all the price checks, like everyone else, and what's happening across, not just to our sector, but also the other channels as well. And over the last 18 months, we have had a very mindful eye exactly where we are compared to each of the targets we have by market. Our answer to that has been Smart Ways to Save, which gives us flexibility, and maybe even more that, points to the way we show our offers to a Family Dollar customer. And so we do see a customer that shops differently. I mentioned first of the month before. Clearly, that's a big driver for us. And so what's on shelf and end caps and either it's on sale or a price drop is how we're approaching it. So looking forward, we're going to watch everyone this year as we go into price checks and see what they're doing across the shelves and we'll react accordingly. But to some degree, it's not new news. Everyone has been waving their flag on saying they're going to bring value. We're in a sector that delivers that with a convenience factor attached to it for our customers, and that's how we're thinking about it starting off the year.
Daniel Binder:
And then just a follow-up, a different topic. But again, a philosophical question. I know you can't say a lot about the impact on border-adjusted taxes. But if one were to go through, are you strongly opposed to breaking the buck? Or do think it would be smarter to just keep that level and engineer the product packaging and count, so forth, to keep it at that level?
Bob Sasser:
Well, Dan, again as I said in my prepared remarks, it hasn't been passed yet. And if it is passed, we really need to see what it covers and how it's done and what the rules are and all that, and I'm sure we'll be able to respond accordingly to that. We have a lot of levers across both banners that we can do. I believe that the pressure on the consumer is going to be potentially, if passed the way everybody is contemplating, it could be a real issue for the consumer. But as far as retailer, we're -- just like everyone else, we will respond accordingly. And I will tell you this, at Dollar Tree, we are -- for 30 years, we've been $1. You talked about the price point. I've been asked that question for a long, long time on other issues as cost changes, as expense has changed, as the markets changed, as inflation, deflation and the like. And we are able to manage that, because we're able to manage our assortment at Dollar Tree. As long as the dollar is the unit of currency, I believe we can -- and we can offer the best value, then we've got a business. So let's wait until we get there. Let us see if it's passed. And if passed, that how -- what the rules are, and then we'll respond accordingly. But I believe we have as much a right as anyone to respond and run a great business going forward. So it'll be different, but let's see what the rules are first.
Operator:
We'll go next to Dan Wewer with Raymond James.
Daniel Wewer:
Can you talk about the new -- the 300 new Family Dollar Stores you're opening in FY '17? And what will be different about these stores compared to the Family Dollar stores you inherited? Perhaps, any commentary about rural versus suburban versus urban locations, things you're doing different, anything different with the store layout, number of coolers? Give us some insight as to how you see the long-term vision for this concept changing.
Gary Philbin:
Dan, this is Gary. Let me take a swing at it first. We're excited to have 300 stores in the renovations. And what you're going to see, listen, the headline is how do we drive a more productive store for our customers at Family Dollar that really enhances the shopping environment. And you're going to see some things that both drive traffic and enhance the customer shopping experience, especially on the discretionary side as well. And I'm not going to give the blueprint of everything that you'll see out there, but I -- the model will be a small box, still. We certainly know how to run our box, both in urban and rural. And what we're going to drive is really the categories and adjacencies that make sense in a Family Dollar world. And I think our opportunity is to find the categories that consistently drive in traffic, week in and week out, which has not always been the case as the box has been developed over time. And we certainly have the pieces to make that a better shopping environment for our customer, and some of that can be our consumables and frozen food. And on the margin pieces, so the elements that we do on seasonal, we're not -- we aren't the same party department that Dollar Tree is by a long shot. But certainly, our customers still have birthdays and celebrate seasons, and those are things that we can enhance and shine up in a Family Dollar world. And the difference that we really have is we still have apparel, and apparel is a category that, for us, we can win in. It's always been a matter of space and the dedication that you give it within the store. And so those are some of the items that, when you combine with the basic elements, our Smart Ways to Save that will sort of come to life in these stores in a way that show our customer categories, adjacencies and the items they need and want, we think, in an exciting shopping environment, is what these will look like. You'll see a split with both urban and rural locations. We know we can be successful in both. And you'll see that split, maybe not evenly between the 2 locations, but it'll be fairly close on both.
Daniel Wewer:
Okay. And then as a second question. Most of the Family Dollar Stores that we have visited, not all, but most, the in-store standards are continuing to look a lot better than they did a year ago, yet I'm sure that the same-store sales growth you were hoping would be a bit better. There's been some discussions about pricing this morning. Our pricing surveys show that your identical pricing is about 10% above Walmart on the consumable items with -- the gap widened because of what Walmart is doing. With the addition of Duncan and his background at Walmart, I believe, in using pricing to drive share, do you think that could be the catalyst that could -- his addition could be the catalyst that leads to Family getting more competitive in pricing on branded items?
Gary Philbin:
Well, I'm counting on it. But I'm clearly happy with Duncan as a partner, number one. And Duncan is going to help us tremendously, I would tell you that. And if I kind of echo what Bob said, his experience doesn't need me to polish it up, but...
Daniel Wewer:
Well, I was thinking in terms of pricing with his background at Walmart, and using pricing promotional strategy to drive share. Do you think that he'll have a stronger voice for Family Dollar making that change?
Gary Philbin:
He's going to be President of Family Dollar. He's going to have as strong a voice as anyone at the table. Here's what I'd like to think about. And listen, the price checks, I get more than everybody out in the field, I'm sure. The way I take a look at the price checks and either it's 10%, which I don't know where you're checking, but we react accordingly. And it comes across both on shelf, everyday pricing. We're rooted on EDLP. We need to show a weekly promotion when we put our ad out there. We launched our customer savings on price drop, which are some of the things they buy most often. So it's a combination of all those things that we go to market with that react to a Family Dollar customer. And so we're going to be mindful where Walmart is and certainly anybody in our sector, but we have more than one tool to go to show our customer value in our store. And that's how we think about it.
Operator:
And we have time for one more question. We will go to Laura Champine with Roe Equity Research.
Laura Champine:
And I'm sorry if I missed this. But when you look at 2017, do you think that the mix shifts more into discretionary? Or do you expect consumables to stay just as strong as they have been?
Bob Sasser:
Well, I would say, Laura, that as strong as they have been, in my opinion, the mix at Dollar Tree -- we have 2 different banners here. So we're a lot more discretionary on the Dollar Tree banner than in the Family Dollar banner. My expectation is it will continue to grow both discretionary and consumable, but the mix is going to be pretty much, I think pretty much the same. At Family Dollar, I think there's an opportunity to sell a little more discretionary. The -- we're going to still go after the consumable business. We want to be the place where our customers shop for the things they need every day. We want to be convenient. We want to be -- have great values for our customers on all the things that they need. So we're not backing down on the consumable business. At the same time, we want to offer them more of the things that are discretionary and great values. Gary mentioned some of the things, everybody has birthdays, our apparel business, our home business. We have, I believe, terrific opportunities at Family Dollar in driving more discretionary business in our home departments, for example. So it's a big question. It's a good question, but it's -- at the high level, that would be my answer. As we get down into walking the stores, 4 by 4, that's how we like -- we look at it. And where should we expand. Where do we have the opportunity to expand. What's our customer tell us that they want more of. How are they responding to our tests when we expand a category, and that's really where we're going to get our answers.
Operator:
And that will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Randy Guiler for any additional or closing remarks.
Randy Guiler:
Thank you for joining us on today's call and for your continued interest in Dollar Tree. Our next quarterly earnings conference call is tentatively scheduled for Thursday, March -- I'm sorry, Thursday, May 25, 2017.
Thank you, and have a good day.
Operator:
That does conclude today's conference. We thank you for your participation. You may now disconnect.
Operator:
Good day, everyone, and welcome to the Dollar Tree Incorporated's Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Randy Guiler, VP of Investor Relations. Please go ahead, sir.
Randy Guiler:
Thank you, Dana. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the third fiscal quarter of 2016. Participating on today's call will be our CEO, Bob Sasser; our 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 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 current report on 8-K, quarterly report on Form 10-Q and annual report on Form 10-K, which are all on file with the SEC. We have no obligation to update our forward-looking statements. 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.
Bob Sasser:
Thanks, Randy. Good morning, everyone. This morning, we announced Dollar Tree's results for the third quarter of fiscal 2016. This represents the first quarter that we've owned the Family Dollar business for a full 3 months in the prior year's comparable quarter. Our acquisition was completed on July 6, 2015.
Total sales for the third quarter increased 1.1% to $5 billion. As a reminder, third quarter results last year included sales from 325 Family Dollar stores that were divested after the end of the quarter. Same-store sales on a constant currency basis increased 1.7%, driven by increases in both traffic and average ticket. Adjusted for the impact of Canadian currency fluctuations, the same-store sales increase was 1.8%. Operating income increased 53.1% to $342.4 million. Net income for the quarter increased 109.4% (sic) [ 109.5% ] to $171.6 million, and GAAP earnings per share was $0.72. Adjusting for $0.09 of expense incurred outside of guidance, that was associated with debt refinancing, adjusted EPS was $0.81 and near the top end of our guidance of $0.76 to $0.82 per diluted share. I'm very pleased with our company's overall performance for the third quarter. We delivered our 35th consecutive quarter of positive same-store sales. Both Dollar Tree and Family Dollar segments improved gross margin rate year-over-year. SG&A expenses across both banners were well managed. Operating margin improved 230 basis points to 6.85% for the quarter and adjusted earnings per share were at the top end of our range of guidance. The Dollar Tree banner continues to show strong consistent growth, and we continue to make meaningful progress in the integration of Family Dollar. We remain on track to achieve our expected synergies target of $300 million and run rate by the end of the first 3 years. This includes improvements in direct and indirect procurement, rebannering of select stores and the development of our shared services model including supply chain and logistics. There is still much more to be done, and I believe, we will, ultimately, surpass our target. Highlights for the Dollar Tree banner in the third quarter included a total sales increase of 8.6%. Same-store sales on a constant currency basis increased 1.7% and this was achieved through increases in both traffic and average ticket. Gross profit margin improved 70 basis points over last year. And operating margin was 11.6%, an improvement of 170 basis points over last year's 9.9%. Excluding acquisition-related costs in the prior year's quarter, operating margin improved 120 basis points. To share some of the color on the quarter, top-performing categories for the Dollar Tree banner include snacks and beverages, household products, seasonal toys and party supplies. Sales in our discretionary categories outpaced sales in our consumables for the quarter. While we continue to experience an estimated 80 basis points of incremental cannibalization resulting from the rebannering of 210 deal stores and 293 Family Dollar stores to Dollar Tree, we delivered positive same-store sales each month throughout the quarter. And despite the calendar shift this year, which moved the last 2 days of October and Halloween sales from third quarter and into fourth quarter, we finished the third quarter strong. October was our highest comp month of the quarter. Geographically, Dollar Tree same-store sales growth for the quarter was strongest in the upper Midwest, the Southwest, the Northeast and the West zones. All zones had positive comps with the exception of the Southeast, which was only slightly negative as it experienced a higher degree of incremental cannibalization from our rebanner initiative. The Dollar Tree business continued to be strong, consistent and growing. This represented our 35th consecutive quarter of positive same-store sales. Our third quarter results once again validate the relevance of the Dollar Tree brand. Customers are shopping our stores more often, and we continue to attract new customers every day and when these customers are in the store, they're buying more. Millions of consumers continue to look at Dollar Tree as part of the solution to help balance their household budgets. We serve a very loyal and growing customer base. Our commitment is to continue serving our existing customers better, while taking every opportunity to gain new customers in every store, every day. Our merchant teams continue to do a terrific job sourcing products that exceed customer expectations for what $1 can buy and at a cost that meets our margin requirements. Our store teams are focused on providing a clean, full, fun and friendly shopping experience and seasonal energy was high beginning in August with Back-to-School. In addition to dominant displays of Back-to-School basics, the customers responded favorably to brightly colored fashion stationery, teacher supplies, classroom residuals and lunchbox values, all priced at $1. In September, we celebrated Dollar Tree's 30th anniversary with Bonus Buys and WOW! items for our customers. Key categories including cleaning supplies, home office essentials, snacks and a broad assortment of special values from our million-dollar brands. Our stores were filled with well-known national brands and high-value private labels throughout the event. Seasonally, our store teams transitioned efficiently from Back-to-School to fall harvest and Halloween. In September, Dollar Tree became Halloween headquarters with major statements in Halloween costumes, makeup, home decor, candy and party supplies. Customers responded enthusiastically and our sell-through was improved over the prior year. We ended the quarter with our inventory clean, well-balanced, seasonally relevant and stores prepared for the Thanksgiving, Christmas and the fourth quarter holiday shopping season. Looking forward, the Dollar Tree segment is positioned for increased relevance to our customers with sustained growth and improved profitability. We have multiple opportunities to continue growing and improving our businesses through opening more stores and through increasing the productivity of all of our stores. In the third quarter, we opened a total of 101 new Dollar Tree stores. We relocated and expanded 15 Dollar Tree stores, and we rebannered 42 additional Family Dollar stores to Dollar Tree's for a total of 158 Dollar Tree projects during the quarter. Total Dollar Tree banner selling square footage increased 8% compared to the prior year, and we ended the quarter with a total of 6,320 Dollar Tree stores across North America. I continue to be pleased with our rebannering efforts. Since the acquisition, our store development teams have rebannered 210 deal stores to Dollar Tree and 293 Family Dollar stores to Dollar Tree in addition to opening 495 new Dollar Tree stores. We ended our third quarter this year with a total of 565 more Dollar Tree stores than the same time one year ago. These new and newly rebannered stores are performing very well in terms of sales and improved operating margin. While the right decision for the long term and the near term, we continue to bear incremental cannibalization on our comp stores of approximately 80 basis points. This headwind will dissipate each quarter through the end of 2017, as we cycle the convergence from the prior year. In addition to new stores, we continue to execute our strategy to improve the productivity of our existing stores. Our drive to business initiatives include category expansion. Customers are realizing more value as we rationalize and expand assortments in pet supplies, hardware, health care, beauty and eye care as well as home and household products. Creating a fun and enjoyable shopping experience with a focus on seasonal relevance. Our stores fronts change with the seasons. At Dollar Tree, we want to own the seasons at the dollar price point. Number three, creating merchandise energy and the thrill of the hunt throughout the store that Dollar Tree always finds an unexpected value. And number four, being first-of-the-month ready. We place special emphasis on basic consumable core items on weekends, and especially, at the beginning of each month, when many customers are shopping for basic needs. We are continuing the expansion of our frozen and refrigerated category. In the third quarter, we installed freezers and coolers in 154 additional Dollar Tree banner stores. We currently offer frozen and refrigerated products in 4,710 stores with plans to continue growing. With the addition of the Family Dollar banner, we have an incredible opportunity to increase and create shareholder value as a combined organization. I continue to be as enthusiastic as ever about our opportunity to grow our business and to serve more customers in more ways. We are deploying a disciplined approach to building the foundation for long-term improvements and the customer experience at Family Dollar. And we remain confident in our ability to capture synergies for the combined organization. With a focus on managing our business for the present, we are developing the foundation for a larger, stronger and more diversified business that will generate cash and build shareholder value for years to come. I will now turn the call over to Gary to discuss Family Dollar's performance and priority.
Gary Philbin:
Thank you, Bob, and good morning, everyone. After 5 full quarters, we continue to make progress at Family Dollar. Our focus at Family Dollar is around the customer-facing initiatives that our customers continue to give us credit for. And we are working hard to improve these across our base of 8,000 stores. Our customers are seeing cleaner, better merchandised stores that have more compelling end cap with price they need for everyday basics and holiday needs. While we have more to do here, we are on the right track with our continued investment in the business basics of the Family Dollar banner.
For Q3, the Family Dollar banner had low single-digit negative same-store sales. However, August was slightly positive. September was our weakest comp during the quarter. And remember last year, we had kicked off our Red Tag Clearance Event mid-month. October was also negative as we cycled the completion of our clearance event last year. And of course, the impact of Halloween in first of the month, shifting money end of the quarter. However, we did see an acceleration of our 2-year stack comp of greater than 100 basis points from Q2 to Q3. And our Q3 basket improved slightly against a negative transactions for the quarter, primarily from the clearance event last year. Our consumable business at Family Dollar outperformed our discretionary business. And geographically, our West and Mid-Atlantic regions were the strongest performing areas of the country for us. In real estate, we opened 52 new Family Dollar stores, we relocated or expanded 24 Family Dollar stores for a total of 76 projects, we rebannered 42 Family Dollar stores to Dollar Tree, and we ended the quarter with nearly 8,000 Family Dollar stores, 7964 to be exact. We will achieve by year-end our target of 200 new Family Dollar stores for the year. And together with Dollar Tree and Family Dollar banners, we now have a total of over 14,000 store locations -- 14,284 across the U.S. and Canada. At Family Dollar, our customer-facing programs continue to drive and show value throughout the store, as we build momentum with our smart ways to save marketing program. Our customers continue to respond to the value and savings across all of our foundations on delivering value for our Family Dollar customers. These simple ways to save reflect from our ad into our store and these show our customers EDLP; pricing on every day values; our sale items that reflect the most meaningful values on key items; Dollar well, which drives a surprise in opening price point throughout the store, compare and save to shout-out really our excellent values on our private brands; price drop, which is our great savings passed on to our customers above and beyond. And during the quarter, we completed our national rollout of smart coupons. Our customers have responded positively with above projection sign-ups from our Labor Day kickoff. We already have over 1 million customers who have signed up. For our customers, it completes a "no-hassle shopping" experience to find national and Family Dollar exclusive offers. Also, we added emphasis to our "smart ways of save" strategy with the kickoff on the CW Network of our partnership of a 30-minute game show called SAVE TO WIN. Our host of the show, Pat Neely, highlights the great product expense throughout the Family Dollar across a high-energy fund format that fits competing real Family Dollar shoppers against each other. So for Family Dollar, it's a great way to reach a demographic overlap that serves us well and really brings additional credibility to our smart ways to save. Another fundamental part of our strategy for success is our focus on table sticks. At a high level, this includes improved store standards and conditions; neat, clean, full, recovered; merchandising relevance and energy; finding what I need at Family Dollar and at a value I recognize; and customer engagement, what we call Family Dollar-friendly. Our customers count on us all month long, but the first 10 days of the month at Family Dollar are critical in their efforts to be in stock, recovered and end caps with the compelling offers. Our focus here revolves around our efforts to have improved direct-to-store delivery, support and service along with our operational teams improving our truck-to-shelf process. The convenience of our stores combined with our focus on improvements across our customer-facing initiatives is the foundation for our improved customer experience at Family Dollar. Our investment across our business is measured with the test and learn discipline to measure our success and to involve our next step initiatives just like at Dollar Tree. So while we have more to do, our team at Family Dollar is motivated and energized to be the best at delivering value to our customers that are unique in many ways and often underserved. Our stores serve a customer that counts on us and responds when we deliver value, customer service and a Family Dollar shopping experience that we are all proud of in the neighborhoods we serve. Now, let me turn the call over to Kevin to provide more detail on our third quarter performance and our updated outlook on Q4 and the full year. Kevin?
Kevin Wampler:
Thanks, Gary, and good morning. Total sales for the third quarter grew 1.1% to $5 billion. Dollar Tree segment total sales increased 8.6% to $2.47 billion, while Family Dollar segment total sales decreased 5.2% to $2.53 billion. Year-over-year sales comparisons for Family Dollar were impacted negatively by the loss of sales from 297 stores, which we rebannered as Dollar Tree stores, in addition to the 325 stores, which were divested as required by the FTC. Same-store sales on a constant currency basis increased 1.7% versus 2.1% in the prior year's third quarter. The increase was driven by both traffic and ticket. As expected, we experienced incremental cannibalization of 80 basis points from the 507 Family Dollar and deal stores that have been converted to Dollar Tree stores. Adjusted for the impact of Canadian currency fluctuations, same-store sales grew 1.8%.
All acquired Family Dollar stores and newly rebannered Family Dollar and deal stores are considered new stores and were excluded from our same-store sales calculation in Q3. Gross profit for the combined organization increased 8.6% to $1.52 billion for the third quarter of 2016, compared to the prior year's quarter. As a percent of sales, gross profit margin improved 210 basis points to 30.4% versus 28.3% in the prior year's quarter. Gross profit margin for the Dollar Tree segment was 34.8% during the third quarter, and 80 basis point improvement compared to the prior year's third quarter. Factors impacting the segment's gross margin performance during the quarter included lower merchandise costs due to favorable freight costs and higher initial mark-on, partially offset by higher distribution and occupancy costs as a percent of net sales. On a GAAP basis, gross profit for the Family Dollar segment increased to 5.6% to $663.2 million. Gross profit margins for Family Dollar segment was 26.2% during the third quarter compared with 23.5% in the comparable prior-year period. Excluding the inventory step-up amortization of $38.4 million and markdowns of $13 million in the prior year -- prior year's quarter, gross profit margin was 26.2% for the quarter compared with an adjusted 25.4% in the prior year's quarter. The improvement is due to lower merchandise, freight and shrink costs, partially offset by higher markdown expense and increased occupancy costs. Selling, general and administrative expenses in the quarter for the combined organization decreased to 23.6% from 23.8% in the same quarter last year as a percent of net sales. Excluding $11.8 million or 25 basis points of acquisition-related expenses in 2015, the SG&A rate remained consistent at 23.6%. Increases in store hourly payrolls as a percent of net sales were offset by lower professional fees and lower depreciation expense, as a percent of sales. Q3 SG&A expense for the Dollar Tree segment as a percent of sales was 23.2%, a 90 basis point improvement compared to the prior year's quarter. The prior year's quarter included $11.8 million of acquisition-related costs. Excluding the prior year's acquisition-related costs, SG&A as a percent of sales improved 40 basis points to 23.2% of sales from 23.6% of sales. The improvement was driven by lower cost as a percent of sales for professional fees, health insurance, store supplies and legal costs, partially offset by higher store payroll expense. On a GAAP basis, SG&A expense for the Family Dollar segment was $606.8 million. SG&A expense for the Family Dollar segment as a percent of sales was 24% compared to 23.5% in the prior year's quarter. The current year includes $3.8 million for severance benefits, while the prior year's comparable period included $6.8 million of acquisition-related and divestiture cost. Excluding these costs, SG&A expense increased 50 basis points as a percent of sales to 23.8% from 23.3% in the prior year. The increase was driven primarily by higher store payroll, health insurance and advertising costs, partially offset by lower depreciation and amortization expense. Operating income for the combined organization increased to $342.4 million compared with $223.7 million in the same period last year. Operating income margin increased to 6.8% for the quarter from 4.5% in the last year's third quarter. Operating income margin for the Dollar Tree segment improved 170 basis points to 11.6% when compared to the prior year's quarter. Excluding the $11.8 million in acquisition-related costs from the prior year's quarter, operating income for the Dollar Tree segment improved 120 basis points to 11.6% compared to an adjusted 10.4% of sales in the prior year third quarter. On a GAAP basis, operating income for the Family Dollar segment increased $57.5 million, to 2.2% as a percent of net sales. Nonoperating expenses for the quarter totaled $112.2 million, which was comprised primarily of net interest expense as well as $26.6 million of acceleration of amortizable noncash deferred financing costs and $2.6 million of fees associated with our debt refinancing. Effective tax rate for the third quarter was 25.5% compared to 34.3% in the prior year's quarter. The decrease was primarily attributable to a onetime tax benefit in the third quarter of 2016 of $21.4 million or $0.09 per share related to a 1% decrease in North Carolina's state tax rate, which decreased the deferred tax liability related to the trade name intangible asset, as well as the adoption of ASU No. 2016-09, under which the incremental tax benefit recognized the Dollar's restricted stock vested as reported in the income tax expense. For the third quarter, the company had GAAP net income of $171.6 million or $0.72 per diluted share compared to the reported net income of $81.9 million or $0.35 per diluted share in the prior year's quarter. Looking at the balance sheet and statement of cash flow, combined cash and cash equivalents at quarter end totaled $733.8 million compared to $1.1 billion at the end of the third quarter of 2015. Our outstanding debt is approximately $7.1 billion, a decrease of $1.2 billion from the end of the third quarter of 2015. Inventory for the Dollar Tree segment at quarter-end was 8.5% greater than at the same time last year, while selling square footage increased 8.2%. Inventory per selling square foot increased 0.4%. We believe that current inventory levels are appropriate to support scheduled new store openings and our sales initiatives for the fourth quarter. Inventory for the Family Dollar segment at quarter-end decreased 2.1% from the same period last year and increased 0.7% on a selling square foot basis. We are pleased with the progress we are seeing at in-stock levels on key items. We are continuing to review merchandise assortments and believe our current inventory levels are appropriate for the fourth quarter. Capital expenditures were $95.6 million in the third quarter of 2016 versus $169.5 million in the third quarter of last year. For fiscal 2016, we are planning for consolidated capital expenditures to range from $620 million to $650 million. Capital expenditures will be focused on new stores and remodels including fee development stores, our rebanner initiatives, the edition of frozen and refrigerated capability to approximately 400 Dollar Tree stores, IT system enhancements and integration projects, and our distribution center projects. Depreciation and amortization totaled $157.6 million for the third quarter. This includes purchase accounting-related costs of $18.3 million for favorable lease rights amortization. Depreciation expense was $168.7 million in the third quarter of last year. For fiscal 2016, we expect consolidated depreciation and amortization to range from $630 million to $640 million. This includes $17.9 million for Q4 and $74 million for fiscal 2016 for the amortization of favorable lease rights for the purchase accounting evaluation of Family Dollar leases. Our updated outlook for fiscal 2016 includes the following assumptions:. Beginning in Q4, our acquired Family Dollar stores will be included in our reported same-store sales. In 2016, the last 2 days of October, our biggest Halloween sales day shifted into our fourth quarter. This shift is included in our sales guidance. Our 2 additional sales days between Thanksgiving and Christmas in 2016. 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 rebanner strategy analysis and our outlook for same-store sales. We have budgeted lower freight -- import freight costs than a year ago. And our interest expense will be approximately $79 million in Q4. Our Q4 and full year guidance includes an impact of $0.03 to $0.04 per share related to the FLSA change and overtime regulations, which takes effect December 1. 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 36.3% for the fourth quarter and 33% for fiscal 2016. Weighted average diluted share counts are assumed to be 237.1 million shares in Q4 and 236.7 million for the full year. For the fourth quarter, we are forecasting total sales to range from $5.59 billion to $5.69 billion and diluted earnings per share on a GAAP basis in the range of $1.24 to $1.33, an increase from prior implied guidance of $1.21 to $1.30. These estimates are based on low single-digit same-store sales increases in both our Dollar Tree and Family Dollar segments and year-over-year square footage growth of 3.9%. For fiscal 2016, we are now forecasting total sales in a range between $20.67 billion and $20.77 billion compared to the company's previously expected range of $20.69 billion and $20.87 billion. The company now anticipates net income per diluted share on a GAAP basis for full year 2016 will range between $3.67 and $3.77 -- $3.76, which includes the effect of $0.09 refinancing costs in the third quarter. This compares to our previous EPS guidance range of $3.67 to $3.82, which did not include any refinancing costs. These estimates are based on low single-digit same-store sales increase of 3.9% square footage growth. And I'll now turn the call back over to Bob.
Bob Sasser:
Thanks, Kevin. Again, I'm very pleased with our overall performance for the third quarter, and I'm extremely proud of our combined Family Dollar and Dollar Tree teams. We are making meaningful progress in developing, what I consider to be, the best model in small-box value retail. Dollar Tree is now a diversified combination of a 6,000 store banner and an 8,000 store banner, each with its unique ability to effectively serve more customers across all types of markets. With the combination of these 2 great brands, we have powerful flexibility in how and where we choose to grow, while expanding our opportunity to grow. Across the combined banners, we will continue to focus on providing greater values to our customers, while delivering superior returns to our long-term shareholders.
Retail is an ever-changing environment, over time we've demonstrated our management team's ability to be agile and nimble to effectively adapt to the changing environment. As discussed on prior calls, we have been preparing for and testing changes to our compensation structure in regard to the new FLSA regulations. We have communicated these changes to our teams to ensure our company's compliance when the new rule will become effective on December 1. As always, we will continue to employ a disciplined approach to drive in key strategic initiatives to the combined organization, through improve communication, analysis, collaboration and incentives. We are 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. The Dollar Tree business model continues to grow and improve. It's powerful, flexible and more relevant than ever, providing extreme value to the customers, while recording record levels of sales and earnings. Our model has been tested by time and validated by history. For 35 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 grow and lead the discount sector. In the third quarter, Dollar Tree banner sales increased 8.6%, same-store sales increased 1.7% and operating margin improved to 11.6%. Our field management and leadership teams are talented, experienced, energized and incredibly motivated. It's a great time to be Dollar Tree. Operator, we are now ready for the questions.
Operator:
[Operator Instructions] And we will go first today to Edward Kelly with Crédit Suisse.
Edward Kelly:
I would like to start with the question on Family Dollar. If we just take a step back and maybe a little bit more detail on the assessment of the progress to date, I mean, the asset clearly holds a lot of opportunity. There clearly seems to be a lot of low-hanging fruit, you've made changes, but the comps have kind of been bouncing around either up or down modestly. Curious sort of like, how you think you are -- how are you progressing, I guess, so far versus what you initially thought? And then what happens from here to get the momentum of the business turned more positively?
Gary Philbin:
Edward, this is Gary. Good morning. I think you're absolutely right. The opportunity is just as big as we saw at the beginning. And as Bob said, we remain just as enthusiastic. A little bit of, when you take a look at the opportunity showed itself in the quarter and even though we were slightly negative for the quarter, August was positive. And then we went against the Red Tag Clearance Event both in September and October. So I wasn't able to overcome some of the traffic. I think the silver lining for me was that the basket lift that we got last year stuck with us this year. And then I would tell you November is starting off how I would hope, going into the holiday season. So I start with saying the foundation that we are building around value, the marketing program, the table stakes, those are the things that we knew we had to do going in just to build the foundation. Anything else we're going to do past that, it has to stick, because we're consistent on delivering value in the store, and we have a shopping experience that our customers find value when they come through the door of a Family Dollar. Long term, what's going to change? While we continue to have the opportunities in front of us that we can enhance by our brands, of course, and we can do more direct imports, but we still have a store base that has wonderful opportunity for us to take a look and figure out how we continue to renovate, put in new assortments, expand the elements in our stores that our customers are looking for. When we see our first-of-the-month business on SNAP for instance, some modest changes that drive business to our frozen food, resonate very well with our customers. So the work so far has been around the foundation that allows us to long-term deploy capital in a meaningful way into our existing store base along with new stores that will create different flow for our customers as she comes in and sees more seasonal merchandise, sees more elements that drive a higher sales per square foot productivity because of our assortment expansions. So that's the work ahead of us. I would tell you that up to this point, we've been very focused on just driving the foundational pieces of our business that we had to fix. And while we are not all the way there, I would tell you we've made progress and it's still our focus as we go into '17.
Edward Kelly:
And just a quick follow-up. In terms of synergies, can you just tell us how much of the $300 million you've captured to date?
Bob Sasser:
Ed, we believe we are right on schedule with what we said on the $300 million. We've never really quantified where we are on that. I'm very excited about the work that's been done there and what we've accomplished so far. And as I said, I expect that we're going to exceed the $3 million over the 3 years -- $300 million excuse me.
Operator:
And we'll take our next question from Stephen Tanal with Goldman Sachs.
Stephen Tanal:
I guess, just to follow up on the synergy point. Can you talk about the onetime cost that you expected to incur as you got there? Are we still thinking about 15% of $300 million sort of in the SG&A and where are you at today, relative to that kind of a number?
Bob Sasser:
So to -- Stephen, just to reset maybe where we laid that out. Originally, we said $300 million of onetime cost to achieve. We said half of it OpEx, half of it CapEx, basically, is how we were looking at it, at the beginning of the process. I would tell you as we -- as I look at it to where we are at to this point, we probably spent more CapEx than OpEx to this point. Because if you think about the number of the stores we rebannered as part of that, that's been a fairly large cost at the end of the day. But we probably have spent more, like I said CapEx than OpEx. But I still think the $300 million hold true. What I don't know exactly at this moment is will it maybe be 60% CapEx at the end of the day as opposed to 50%. I think there is -- could be a little bit of movement in that direction as we think about, not only rebanners, but the systems integration and various other projects. We have got one D.C. that we co-bannered, so a lot of things that we have done have required capital dollars to make those changes. So I think it may lean a little bit closer, little heavier on the CapEx side than the OpEx at the end of the day.
Stephen Tanal:
Got it. That's helpful. And I guess, just on Family Dollar, thinking about the guidance of the fourth quarter, what kind of gives you the confidence in the inflection there?
Bob Sasser:
Well, it's a I think a comparison to last year where we know that we went to this holiday season, I think, better merchandised. Our stores are cleaner. They are better merchandised because we were exiting our Red Tag Clearance Event really into the second week of November last year was the final cleanup. We've just gotten off to a quicker, better start. I think our assortment is going to be compelling and our offers through -- from Thanksgiving through Christmas give us that confidence. And I think our customers are starting to recognize they can come in to a Family Dollar on a more consistent basis and find what they need. Our in-stocks, I would tell you, we triangulate on it from both what our system says and then what have we done to our sales to cause any missteps, and then finally, in-store, what are we doing to have better in-stock. And I would just tell you that those 3 pieces were in a better position now than a year ago. And I think that's where our customer sees when she comes into our store. So that's what gives me the confidence. And like I said, while it's early start to the holiday season, nothing tells me that we shouldn't have a positive comp on the quarter.
Stephen Tanal:
That's great to hear. And just lastly from me, as we think about leveraging our models, is there -- how should it really play out from here? When do you expect to make bigger paydowns? Where do you expect to get over time sort of thing?
Bob Sasser:
Sorry, Steve, You broke up a little bit. Could you repeat the question?
Stephen Tanal:
Yes, sorry. I was asking about just leverage and how that should play out from here? What do you expect to make debt paydowns or how should we think about that leverage ratio over time?
Bob Sasser:
Yes, I mean, obviously, as we've stated our long term our goal is to get back to investment grade. With the refinancing we did here in the third quarter, we did pay down additional $242 million of debt. And last year, after the holiday season, we made a pay down. We will be in a position to consider that again this year. The -- as I look at it today, I think we have the opportunity to be investment grade by fiscal year '19. And again, we think that's important just from a flexibility standpoint as we go forward and having the flexibility to be able to do whatever we want to do from a finance. And again, also from investment grade, it will bring down the cost of capital overall as well. So I guess that's what we are thinking about it. We're going to continue to build the business and invest in the business and grow the business. But we are also go -- working to continue to pay down the debt as well.
Operator:
[Operator Instructions] We will go next to Dan Wewer with Raymond James.
Daniel Wewer:
Gary, when we had a chance to visit a lot of Family Dollar stores, the in-store banners look terrific compared to what they were a year ago. But we also see that pricing remains somewhat higher relative to Dollar General and Walmart. My question is, would you be willing to reinvest into more aggressive pricing at Family Dollar in an effort to regain market share at a faster rate?
Gary Philbin:
Dan, thanks for the comments on the store conditions. It's something we're working hard on and proud of, when we make progress, more to come. But for pricing, I would tell you we are aware of all the competitive checks out there. And I would just tell you it varies as you probably see by geography across the U.S. There are certainly pockets that are more competitive than others. I would tell you, our response is really built around our foundation of how we go to market still. So from the standpoint of what do we do on -- like every retailer, what do we do an ad versions. But with us, we also have the ability to do price drops along with our base price conversions, along with playing up private brands, along with showing dollar well. And that gives me the flexibility that as I can go to market with some or all of those to show customer the value. So I'm aware of where the competitive checks are when we go face-to-face with all those folks. But I want to maintain the flexibility at this point of putting the right offer for our customer in front of we're on first of month and at the holidays. So that's where I'm focused right now, and it's not lost on me where everyone is at. And we are responding, we think, in the right way across those markets.
Daniel Wewer:
And just 2 real quick questions. One, can you discuss how deflation impacted same-store sales for the Family Dollar segment. I guess, the impact for Dollar Tree to be less. And then also, any comments on the Utah Distribution Center supporting both brands and what's going to be the rollout for the other distribution centers supporting both brands going forward?
Bob Sasser:
Well, I'll comment on the deflation. I mean, obviously, we're not a grocery store. And I would say the biggest impact in a Family Dollar is, obviously, milk and eggs, bread to a lesser degree. You can see the impact in those categories, but I don't want to hang my head that, that's been any impact. I think our 4 walls what we can control is such a bigger opportunity for us to have those items in stock for first of the month and make sure our customers have it when they come into -- we have it when they come into the store. That's our opportunity. And we will roll through the price deflation as we go into next year and then we'll be back apples-to-apples.
Gary Philbin:
The St. George's test that we rolled out earlier in the year -- by the way, went very smoothly. It was accomplished faster than we expected it to be accomplished and high marks to the people who worked together on both sides, both banners to make that happen. We are assessing the success of it and the savings that we're gleaning from it right now. I think we need a few more -- a little more time to understand the operating metrics there and where there are opportunities to save, as well as some other ideas that we've got in logistics. I'll tell you that we haven't settled in on the answer to your question yet, how many and when or what, but we are working very hard on deciding what that should be as we go forward as well as other opportunities that we have in the logistics network. I believe that in the long term, that some of the highest returns of synergies are going to come from our supply chain and how we manage our distribution network across the country. So big opportunity there. A lot of it's tied to IT integration, that's a big part of the gating factor of the speed that we want -- that we're going to be moving forward. But so far so good. We accomplished the combination very quickly, quicker than we thought, and we're now looking at the results.
Operator:
And we'll take our next question from Paul Trussell with Deutsche Bank.
Paul Trussell:
Wanted to discuss the puts and takes on EBIT margins in both banners for the Tree. Obviously, a very strong result in 3Q. If you can just help us understand which of those drivers can sustain into the fourth quarter? And then for Family Dollar, I believe it was about 2.2% EBIT margin rate, which is lower than kind of the run rate from the past few quarters, help us understand what took place in 3Q and what will change going forward?
Bob Sasser:
Sure, Paul. The -- so as we look at it, we look at the Dollar Tree banner, obviously, very strong gross profit during the quarter with improvement of 80 basis points. And, again, lower freight costs, better mark-on. Obviously, our merchant team has been doing a great job continuing to source unbelievable values at the $1 price point. And obviously, it's been a little bit of a buyer's market to a certain extent on the discretionary side for the foreign purchases, so that's always helpful. But again, what we always do is we manage that. We have to make sure that we're credit, providing a value to the consumer at that dollar price point and that's something that we've been able to go. You know freight in itself has been a benefit. I would tell you a couple of things. One, Q4 is the quarter in which we see basically a flip where diesel will not be a benefit in the fourth quarter. Diesel will actually be a slight headwind in the fourth quarter compared to last year than where the pricing was. We have import benefits through our contract, which goes through the end of the April. But obviously, that landscape is changing as well as we go forward, so we have to keep that in mind. But so -- but I would tell you, I would think for the fourth quarter, we would expect to see our gross profit continue to expand in the Dollar Tree banner. On the SG&A side of the equation, we saw some various moving pieces as I spoke to in the sense of lower costs for professional fees, health insurance, store supplies and legal costs and -- but we also had investment store payroll. So we do believe it's important. We will continue to invest in store payroll as we go forward. We believe it's an important aspect of running good stores that our customers expect as we go forward and the conditions and merchandised and full, fun and friendly. So we think that will continue. But I'd say there is opportunity on the SG&A on an overall basis, but I think probably gross profit is a little bit bigger potential. When you look at Family Dollar, Family Dollar on a GAAP basis basically improved from a flat operating margin to a 2.2 operating margin for the quarter. I think you have a lot of different moving pieces. On an adjusted basis, you saw improvement in the gross profit line items. And really, again, we saw improvement in mark-on, improvement in freight, improvement in shrink. And I think those are areas we think we can continue to improve upon. And I would tell you that one of the call ups was higher markdown, but I think that the somewhat -- that is really a condition of last year. If you remember in Q2 last year, we took $60 million reserve from markdowns for the Red Tag Clearance Event which then happened in Q3. So our -- we are able to take that reserve to offset some of those markdowns in Q3. So our Q3 markdowns last year are probably a little below what they would be on a normal run-rate basis. So that's -- that was not unexpected at the end of the day. On an SG&A basis, I think one of the things we have going on is we do have a geography change going on in the Family Dollar P&L between merchandised margin and advertising. So we are getting -- we are taking -- we are not taking co-op dollars. We are getting at net costs upfront from the product. So we are seeing an increase in advertising, which was called out in my comments -- prepared comments and that will continue as we go forward. So -- but otherwise, we've also had store payroll investments as well in Family Dollar. So some puts and takes there as well. But on a go-forward basis, we do expect there, maybe, some investments there but I would expect that depreciation and amortization on the Family Dollar banner will continue to decrease as we've cycled through the comparisons of the harmonization of depreciation policies and the favorable lease rate. So somewhat of a long-winded answer, but that's kind of the puts and takes, Paul, as I see them.
Paul Trussell:
No, that's very helpful color. My follow-up just to Gary, just regarding Family Dollar merchandise assortment. As you mentioned certainly, there is a more compelling offering. If you can just help us better understand what categories you're -- we should see when we walk in the store, the kind of greatest rate of change over the near term, whether that's on the seasonal side and your approach to the holidays and also maybe discuss just what are the -- what you're implementing from a consumable standpoint?
Gary Philbin:
Paul, I would say what we worked hard on and which, I would hope, you'd see walking into a Family Dollar now is just the fact that end caps reflect more of what we have in our ad and the seasonal relevance and the holidays. And we have cleaned up, obviously, from a year ago. Really, the merchandise that did not have a home and they tended to collect on end caps. And so our ability to put in front of the customer what she wants on a weekly, monthly and during the holiday basis is by far the biggest difference that you're going to see at a Family Dollar. The tweaks that you see on assortments going up and down the aisles really reflect around what we think our customer is most interested in and that reflects around our basics and things like candy and our consumable business, including frozen food, which drives traffic; and in our discretionary business; we still have a strong apparel business on ladies that is seasonally relevant and driven by cold weather, which looks like we are finally going to get a bit of as we go into the Thanksgiving holiday. And just around the seasonal displays and impact, much like you see sometimes at Dollar Tree, the things our customers need in the last few days going up to a holiday, Family Dollar shopper shops so much later in the season that our ability to get ready for that and to have those displays on the floor or on the shelf are very important for us. All that being said, I would tell you the biggest lever Family Dollar had at the beginning of this process was just getting in stock. And that's what we continue to work on every day of the week to make sure that we have it with support from our DST suppliers as well as what we're touching from the back door to our shelf.
Operator:
And we do have time for a couple more questions. We'll take our next from Michael Lasser at UBS.
Michael Lasser:
Gary, you mentioned that November is starting off how you would hope, which market's interpreting that the business is coming positive. Would that still be the case, if you adjust for Halloween shifting into the early part of this quarter? And can you also, as part of that, discuss maybe what's not working as well as what you thought. The intent here is to understand where the biggest opportunities for improvement are to really put the business on a sustainable comp path higher?
Gary Philbin:
Well, you haven't done all of the math on how we just had a good first of month, Michael, for the first 10 days, so sort of forgetting where Halloween impacted us those first 2 days. Really a lot of our focus is what's happening to us from the 1st through the 10th of the month and that is where we saw a nice impact on first of month. And we've been able to sustain that kind of activity through the additional weeks. Big week in front of us, obviously. But I would say it's -- we are going into the very meat of the holiday, obviously, this week and kickoff on Thursday, going to the balance of the quarter into Christmas. Then we'll keep our fingers crossed on weather. But that we'd have just the right amount of cold weather to sell all of our apparel that we need and not too much snow that people can't get to stores. That being said, what's the biggest opportunity, I would say, besides the basics I've mentioned on being in-stock and compelling values, is then renovation of some of our store base. Because we are still at risk on the older stores at Family Dollar that require either perhaps some deferred maintenance, but maybe even more than that gain the right assortment in the store with the right amount of square footage for each of the departments. And that's where we see the path long term to drive a sustained comp at Family Dollar to -- that's the basics in retail about having the right assortment and part of that is how is it set up in each of our stores. So when you take a look at the Family Dollar fleet, it works against us right now, where we have a large fleet of older stores. The upside is once we get into them and renovate them, there is a long runway there for us to keep improvement across our store base.
Michael Lasser:
That's helpful. My follow-up question is, if you look back at your projections at the outset of your path to improve Family Dollar, are you having to invest more merchandise margin dollars and operating expense dollars than you originally expected? Either because of what you have learned about the business or because the operating environment is different when -- than what you thought because of factors like deflation or price competition?
Bob Sasser:
That's a good question. I don't know I can say how I thought about from the beginning to now. I think what -- we've gotten the benefit of is the work on synergy has given us the ability to see that -- when you take a look at the margin expansion at Family Dollar, a good piece of that is a synergy work. Another good chunk of that is what we just do at Family Dollar in terms of auctioning and getting the best cost and as markets go up and down, making sure we are getting true net cost. I think the synergy work over the long term will give us flexibility. So when we said $300 million, I think we've all said we would be disappointed if that's all we ended up with. So the flexibility that, that gives us in Family Dollar is to say where should we invest it now. We went into knowing that we had deferred maintenance in CapEx to put into the stores. We are on a -- we've been following that model. It's a sequenced in a way that gives us the biggest feedback. We've invested in store labor because we just flatly needed to, to give our customer a better shopping experience, but that was -- that's proceeding as we projected. So I don't know that it's changed from what we thought. It, certainly, never quite goes maybe as fast as I would like to see it happen, but I'd -- I feel that we are on track with the things, with the big levers that we started with at Family Dollar. We have stayed focused on and stayed true to. And at the end of the day, staying focused on what our customers will give us credit for. And that's maybe the anchor that we went into this with and it's where we are today.
Operator:
And we will take our final question today from John Zolidis with Buckingham.
John Zolidis:
Question on Family Dollar. You mentioned the in-stocks being the most important lever. If I think back to the management of the business under the prior regime, one of the things that was tried at various times was to change the SKU counts, increase the assortments in terms of total choice, particularly in HBA that was the category where they took assortment counts up, and then -- and so what I'm wondering, and this is partially based on visiting the stores and sometimes noting that the Family Dollar stores appear to have fewer items or choices than some comparable format retailers, where do you are think you are with the breadth of the assortment in the stores? Does it need to increase, decrease and how does that relate to the efforts to get in-stocks in place as you move forward?
Bob Sasser:
John, I think it's -- I think what you're going to see -- listen, it's not going to be a dramatic big bang, where you see hundreds of SKUs dropout one week over the past week. I think our measured approach here has really been doing line reviews and really taking a look at the SKUs that are most meaningful for our Family Dollar customer, what's responding to us as we put against the backdrop of our smart ways to save. And we are going to take a look really 4 feet by 4 feet that says, what's the reason to have the offering that's in front of the customer and to have the right assortment. I'm not caught up in SKU count. It's certainly a piece of it as much as it is on how I'm going to drive productivity and profitability 4 feet by 4 feet through the store. And so, I -- while the 2 are related, I really think a little bit of it is, how do I get the right assortment at Family Dollar across these categories. You'll see some additional expansions in the future on some categories. But clearly, we had an opportunity to just get ourselves looking through the lens of value from our customer to have the right assortment at Family Dollar. The in-stock piece, while related, is the opportunity for us just to make sure that we are in-stock, on shelf for our customer. And that's the work we are working very hard on to make sure that we have, especially the first 10 days of the month, but have the items that are most meaningful for our customer on the shelf. So the 2 are as hand and glove, but I sort of view them independently in terms of our work process.
Operator:
And we will have time for one more question. We will take it from Matthew Boss with JPMorgan. And with no response, we will move to our next. We'll go to Alvin Concepcion with Citi.
Alvin Concepcion:
Just wanted to ask about the competitive promotional environment, what you found in third quarter into November, perhaps sequentially over year-over-year, I think you said you're comfortable with your competitive response. So would you consider it pretty rational out there and just general observations would be helpful.
Bob Sasser:
Alvin, this is Bob. Just a couple of notes on the competition. From a Dollar Tree perspective as well as the Family Dollar perspective, we've always seen it as being highly competitive in our sector discount store sector. So it continues to be. We see a lot of activity out there, especially now with the big-box and the grocery stores, and especially, on the food side of the business. From the Dollar Tree side, we're pretty well insulated from that from the standpoint of, our goal is to offer the greatest value to the customer for $1 and the ever-changing mix. So we don't always excel exactly the same items as some of the big-box retailers or even the Family Dollar small-box sector. So from the Family -- from the Dollar Tree side, we are -- we watch what the competitors are doing as always, but we're really focused on the customer and offering the best value there. That's about half of our business. The other half of our business is Family Dollar and more traditional type of a business, more is planogrammed, we sell lot more of the same things that others sell. We've been watching that. As Gary said, we shop religiously for competition, whoever they may be across a broad geography and very thoroughly, and we take that information and react to it accordingly. Really keeping the focus on what's important to our customers. We want to do what's in the best interest of our customers with the offering. And offer more value in more ways. One of the things that Family Dollar, and I'm extremely excited about, that was touched on really maybe on the last question, was the things that we've done and how -- what may be -- has been accomplished. And one of the major accomplishments I see is our smart ways to save marketing program. It's -- you want -- the store is the ad, the store is what we are selling to our customer. There's more to it than just an item or a product. It's a shopping experience and it's an in-stock, in-store and it's the whole idea of your Family Dollar store and customer engagement in the stores. So we've made a lot of progress on our smart ways to save. Every day low price, as Gary says, throughout the store. Sale items, frequent sale items. Our Dollar WOW! in our stores, it's not a Dollar Tree. But we have a Dollar WOW! section in our Family Dollar stores. It has gained a lot of traction. Our price drop program continues to find traction and interest from the customers. Our shop and compare with our private label and the newest one is our digital coupon, that Gary said, in a short period of time we had over a million customers sign up for. So just that idea of engaging with our customers, the store matches the ad, the ad matches the store. When a customer comes in, there is an expectation of being in-stock, in business, finding what they need. May not be as many SKUs as the big-box guys. We don't have room for everything. But what we have is what our customers expect to have, and we have it in-stock every day as well as our ad items. So I look at the competition always, and I'm very much as we are all a student of retailing. But at the end of the day, all of our actions are focused on the customer and executing our plan to that customer. We are going to be competitive. We're going to be appropriately competitive. We're going to shop the market, but we're looking for more ways to engage the customer to offer even more value than our competitors offer. That takes a little time. But frankly, I think, we are right on target with that. And the building of the foundation that we will expand into the future -- for years into the future, I think that's one of the most important things that we can do as a retailer, just build this Family Dollar business, so that it survives any -- there is always going to be a price issue here, there. There is always going to be emphasis on one category or the other. What will stand the test time is how we are serving our customers, offering the best product at the best price and the shopping experience that they expect.
Alvin Concepcion:
Thank you. And my follow-up is just a quick one for you. Did you see any impact from Hurricane Matthew or SNAP with your comps this quarter?
Bob Sasser:
We didn't even mention the hurricane for a good reason. Because I was -- maybe I thought about it, but if I said anything about the hurricane, yes, there was an impact. But our people did such a fabulous job of getting through there. We had stores closed. We had stores without electricity. We lost service from our Savannah Distribution Center for days because we couldn't get workers to the D.C. in order to serve. We were servicing stores in that area out of our South Carolina Distribution Center for example and -- for Dollar Tree. So our store teams and our logistic teams and everyone just did a fabulous job in really difficult times. That was a category for right -- came all the way from Florida up to Virginia off the coast. It hit a lot of people and created a lot of issues. So out of that, we had some extra markdowns because we lost some electricity. We lost a few stores out of that. You see the results though and it's really -- it did not bring us to our knees. It did not cripple us. Our people just did a fabulous job on really scrambling to continue to serve the customer in the best way possible. So we didn't speak to it, because we came through it in rare fashion.
Operator:
And at this time, I'll turn the call back to Randy Guiler for any additional or closing remarks.
Randy Guiler:
Thank you, Dana. Thank you for joining us for today's call and for your continued interest in Dollar Tree. Our next quarterly Earnings Conference Call is tentatively scheduled for Wednesday, March 1, 2017. Have a great holiday.
Operator:
Thank you. And that does conclude today's conference. Thank you for your participation. You may now disconnect.
Operator:
Good day, and welcome to Dollar Tree's Second Quarter Earnings Conference Call. Today's conference is being recorded.
At this time, I would like to turn the call over to Mr. Randy Guiler, Vice President, Investor Relations. Please go ahead, sir.
Randy Guiler:
Thank you, Melanie. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the second fiscal quarter of 2016. 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 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. These are included in our most recent press release, most recent current report on Form 8-K, quarterly report on Form 10-Q and annual report on Form 10-K, which are all on file with the SEC. We have no obligation to update our forward-looking statements, and you should not expect us to do so. 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.
Bob Sasser:
Thanks, Randy. Good morning, everyone. This morning, we announced Dollar Tree's results for the second quarter of fiscal 2016. As a reminder, our second quarter 2015 included only 1 month of Family Dollar performance as our acquisition was completed on July 6, 2015.
Total sales for the second quarter increased 65.9% to $5 billion, and same-store sales on a constant currency basis increased 1.2%, driven by increases in both traffic and average ticket. Adjusted for the impact of Canadian currency fluctuations, the same-store sales increase was 1.1%. Operating income increased 189.5% to $357.2 million. Net income for the quarter was $170.2 million. And GAAP earnings per share was $0.72, which was the top end of our guidance of $0.66 to $0.72 per diluted share. I'm very pleased with our company's overall performance for the second quarter. We delivered our 34th consecutive quarter of positive same-store sales. The gross margin rate in both the Dollar Tree and Family Dollar banners improved year-over-year. SG&A expenses across both banners were well managed. Operating margin improved 300 basis points to 7.1% for the quarter, and earnings per share were at the top of our range of guidance. We're making progress in the integration of Family Dollar and in the achievement of our previously announced run-rate synergies of $300 million by the end of the third full year post-acquisition. This includes savings in direct and indirect procurement, improvements in sales and profitability from the rebannering of underperforming stores and the development of our shared-services model, including supply chain and logistics. There's much more to be done, and I believe we're on pace to surpass our target. Highlights for the Dollar Tree banner in the second quarter included a total sales increase of 8.5%. Same-store sales on a constant currency basis increased 1.2%. I will add, this was in the face of headwinds from our rebannered Family Dollar and Deals stores, and this was achieved through balanced increases in both traffic and average ticket. Gross profit margin increased 20 basis points, and operating margin improved 110 basis points from the prior year's quarter to 11%. Excluding acquisition-related costs from the prior year's quarter, operating margin improved 30 basis points. Top-performing categories for the Dollar Tree banner included party supplies, snacks and beverage, toys and household products. Sales in our discretionary categories outpaced sales in our consumables for the quarter. And geographically, Dollar Tree banner same-store sales growth was strongest in the Midwest and in the Southwest. The Dollar Tree business continues to be strong, consistent and growing. This represented our 34th consecutive quarter of positive same-store sales. Our second quarter results once again validate the relevance of the Dollar Tree brand. Customers are shopping in our stores more often, and we continue to attract new customers every day. And when these customers are in the store, they're buying more. Both traffic and average ticket contributed to our comp growth. Millions of consumers continue to look at Dollar Tree as part of the solution to help balance their household budgets. We serve a very loyal and growing customer base. Our commitment is to continue serving our existing customers better while taking every opportunity to gain new customers in every store every day. Our merchant teams continue to do a terrific job sourcing products that exceed customer expectations for what $1 can buy and at a cost that meets our margin requirements. Merchandise values at Dollar Tree are better than ever, and our merchandise margin increased once again in the second quarter. Our store teams are focused on providing a clean, full, fun and friendly shopping experience, and seasonal energy was high in May, beginning with Mother's Day. In addition to party essentials, Dollar Tree stores were well stocked with cards, gifts, gift bags, balloons and candy for that special person. Seasonal sell-through was good, and stores quickly and efficiently transitioned to patriotic themes in the celebrations surrounding Memorial Day, picnics, pools, beaches and Summer Fun. Reflecting the seasonal strength of Mother's Day and Memorial Day, along with a strong basics performance, May was the best month for comp store sales. We ended the quarter with our inventory clean, well balanced, seasonally relevant as stores prepared for the back-to-school season. 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 businesses through opening more stores and increasing the productivity of all of our stores. In the second quarter, we opened a total of 99 new Dollar Tree stores. We relocated or expanded 18 Dollar Tree stores. We rebannered the remaining 32 Deals stores to Dollar Tree stores, and we rebannered 47 Family Dollars to Dollar Trees for a total of 196 Dollar Tree projects during the quarter. Total Dollar Tree banner selling square footage increased 10.4% over the prior year, and we ended the quarter with a total of 6,184 Dollar Tree stores across North America.
Additionally, I'm pleased to report that during the second quarter, we successfully completed the rebannering of our Deals stores. As a reminder, 210 Deals stores were converted to Dollar Tree stores. 9 Deals stores were converted to Family Dollar stores, and 3 were closed as their lease term expired. All of our resources and efforts are now dedicated to our 2 primary growth banners:
Dollar Tree, where everything is $1; and Family Dollar, your neighborhood discount store.
I'm especially pleased with our rebannering efforts. Over the past 4 quarters, our Dollar Tree banner store development teams have rebannered 210 Deals stores to Dollar Tree and 251 underperforming Family Dollar stores to Dollar Tree, in addition to opening 384 new Dollar Tree stores. As a result, we ended the second quarter of this year with a total of 845 more Dollar Tree stores than we ended the second quarter last year. These new and newly rebannered stores are performing well in terms of sales and improved profitability. While this is the right decision for the long term, in the near term, there was increased pressure from cannibalization on our comp stores of approximately 80 additional basis points during the second quarter, we expect this to be a headwind through the remainder of the year. In addition to new stores, we continued to execute our strategy to improve the productivity of our existing stores. Our drive-the-business initiatives include category expansions, where customers are realizing more value as we rationalize and expand assortments in pet supplies, hardware, health care, beauty and eyewear as well as home and household products. A fun and enjoyable shopping experience with a focus on seasonal relevance. Our storefronts change with the seasons. At Dollar Tree, we want to own the seasons at the $1 price point. We're driving the business by creating merchandise energy and the thrill of the hunt throughout the store. And at Dollar Tree, you'll 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 on weekend and especially at the beginning of each month when many customers are shopping for basic needs. We are continuing the expansion of our frozen and refrigerated category. In the second quarter, we installed freezers and coolers in 157 additional Dollar Tree banner stores. We currently offer frozen and refrigerated product in 4,559 stores and growing. And we're well on our way with our plan to expand frozen and refrigerated to 400 additional stores in 2016. We continue to invest in infrastructure. Dollar Tree DC11, our new 1.5 million square foot South Carolina distribution center, was completed on time and began serving stores in the Southeast and Mid-Atlantic regions in June. The expansion of our Stockton, California DC is adding additional capacity as we grow in our West Coast stores. And the work to co-banner the Family Dollar DC in St. George, Utah has been completed. This DC is now servicing both banners from the same facility. With the addition of the Family Dollar banner, we have an incredible opportunity to increase and create more shareholder value as a combined organization. I am as enthusiastic as ever about our opportunity to grow our business and to serve more customers in more ways. We are employing a disciplined approach to building the foundation for long-term improvements and the customer experience at Family Dollar. And we remain confident in our ability to capture synergies for the combined organizations. With a focus on managing our business in realtime, our eyes are on the future 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. I'll now turn the call over to Gary to discuss Family Dollar's performance and priorities.
Gary Philbin:
Thank you, Bob. Good morning, everyone. We continue to make progress at Family Dollar that's driving our performance and customer-facing initiatives. Now 1 year into the integration, our customers are seeing stores that are cleaner, better merchandised on promotional end caps, elimination of old inventory and improvement on our in-stock position. Certainly, more work is to be done across these important customer-facing initiatives. Our feedback has been positive. Store teams have received the tools to do better with these initiatives and have responded with great efforts to drive our in-store customer experience.
For second quarter, our same-store sales for the Family Dollar banner were slightly negative and were affected by the calendar shift, which moved the August 1 of the month from second quarter last year into third quarter this year. Basket improved slightly against negative transactions. Our performance was balanced between discretionary and consumable, with consumables performing slightly better than our discretionary business. Stronger sales were at the beginning of the quarter, July was slightly negative. And geographically, comp store sales were strongest in our West and Mid-Atlantic regions. In real estate, we opened 57 new Family Dollar stores, relocated or expanded 34 Family Dollar stores for a total of 91 total projects. We rebannered 47 Family Dollar stores to Dollar Tree, and 7 others were in the process of conversion at quarter end. We ended the quarter with 7,945 Family Dollar stores, and we continue to track on achieving our previously announced target of 200 new Family Dollar stores in 2016. At quarter end, we have total of over 14,000, 14,129, to be exact, Family Dollar and Dollar Tree stores across North America.
At Family Dollar, our focus remains around 3 fundamental principles:
know our customer, improve our shopping experience and drive the value equation for our customer. This translates into our customer-facing messaging in-ad [ph] and in-store, which is our "smart ways to save" program. We're pleased with the reception and traction from our customers. The value at Family Dollar is built upon this simple thought, "smart ways to save", based around EDLP pricing on key items for our customer, price drop on planned items for our customers' shopping list, Dollar well [ph] items on key opening price point SKUs and compare and save for our most meaningful, incredible value private-brand items. We're also placing continued emphasis on our national brand items that are most meaningful and complemented with other value brands that emphasize the value of our assortments.
We continue to win back customers and drive additional visits. We have worked on our promise to deliver a better customer experience. We call these our table stakes, the building of a foundation for an improved customer experience at Family Dollar. These include store standards and conditions; neat, clean, full, recovered; merchandising relevance and energy; Family Dollar has what I need and at a value I recognize; and customer engagement, we call this Family Dollar-friendly. Our team members are part of the neighborhood they serve. We are convenient and friendly. While some of these require investments in facilities or equipment or labor, not everything does as we continue to have our field teams make progress on the basics of truck-to-floor and recovery standards. Our merchants and field teams are working hard to be first-of-the-month ready and weekend-ready, when our customers count on us the most. Displays and recovery around these important days are part of our planning and execution. We know our customers measure us against their view of store cleanliness, product assortment, customer service, speed of checkout. We're working hard to deliver these elements across 8,000 stores. We can be the store of choice for our customers' basic shopping needs, along with the excitement of seeing the newness of the seasons and holidays. Our investment in the business and our table stakes initiatives are being managed with the same disciplined approach we built the Dollar Tree business for, for many years. Our focus is on what our customer needs and gives us credit for, adapting along the way as the important productivity enhancements that allow us to reduce cost within our systems and process, then reinvesting some of these savings again, where our customers will see benefit. Test and learn is part of the process and points us to the best areas to invest. While we have more to do, we have a motivated team at Family Dollar that is in this to drive value to a customer that is often underserved and store teams that with the right tools, can win in their store, neighborhood by neighborhood. Now I will turn the call over to Kevin to provide more detail on our second quarter financial performance and our updated outlook for Q3 and full year 2016.
Kevin Wampler:
Thanks, Gary, and good morning. As a reminder, the prior year's second quarter included 1 month of performance for our Family Dollar segment, following the completion of our acquisition. Going forward, all year-over-year comparisons will include a full 3 months for the Dollar Tree -- for the Family Dollar segment.
Total sales for the second quarter grew 65.9% to $5 billion, which includes our fourth full quarter of Family Dollar sales. Dollar Tree segment total sales increased 8.5% to $2.39 billion, while Family Dollar segment total sales decreased 4.5% to $2.61 billion. Year-over-year sales comparisons for Family Dollar were impacted by the removal of 268 stores, which were rebannered as Dollar Tree stores, and 325 stores, which were divested as required by the FTC. The total reduction in Family Dollar store count as a result of rebannering and divestitures is 593. Same-store sales on a constant currency basis increased 1.2% versus 2.7% in the prior year's second quarter. The increase was driven by both traffic and ticket. As expected, we experienced incremental cannibalization from 465 Family Dollar and Deals stores, which have been converted to Dollar Tree stores. As Bob mentioned, the incremental cannibalization was approximately 80 basis points for Q2. Adjusted for the impact of Canadian currency fluctuations, same-store sales grew 1.1%. All acquired Family Dollar stores and newly rebannered Family Dollar and Deals stores are considered new stores and are excluded from our same-store sales calculation. Gross profit for the combined organization increased 76.8% to $1.51 billion for the second quarter of 2016 compared to the prior year's quarter. The majority of the $657.2 million increase was driven by the addition of Family Dollar's gross profit for the full quarter of $588.4 million as the second quarter of 2015 included only 1 month of the Family Dollar performance. Gross profit for the Dollar Tree segment increased 9.2% for the quarter. Gross profit margin for the Dollar Tree segment was 34.3% during the second quarter, a 20 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 due to favorable freight costs and higher initial mark-on, partially offset by higher distribution and occupancy costs as a percent of net sales. On a GAAP basis, gross profit margin for the Family Dollar segment increased $588.4 million. The increased amount was due to the 9 additional weeks in the second quarter of 2016 when compared to the second quarter of 2015. Gross profit margin for the Family Dollar segment was 26.6% during the second quarter compared with 22.9% in the comparable prior year period. Excluding the inventory step-up amortization of $1.9 million in the current quarter and $11.1 million in the prior year's quarter, gross profit margin was 26.7% for this quarter compared with 23.3% in the prior year's full quarter. The increase is primarily due to higher mark-on, lower shrink and the prior year period being negatively impacted due to the $60 million of markdown expense related to SKU rationalization and planned liquidations. Selling, general and administrative expenses in the quarter for the combined organization increased 57.9% to $1.16 billion from $731.8 million for the -- in last year's second quarter. The majority of the $423.4 million increase related to $398.6 million of incremental Family Dollar expense. Q2 SG&A expense for the Dollar Tree segment as a percent of sales was 23.3%, an 80 basis point improvement compared to the prior year's quarter. The prior year's quarter included $16.5 million of acquisition-related cost. Excluding the prior year's acquisition-related cost, SG&A as a percent of sales decreased 10 basis points compared to the adjusted 23.4% of sales for the prior year's quarter. The year-over-year decrease for the quarter was driven primarily by lower payroll costs as we implemented our shared-service model, lower incentive cost based on performance and reduced legal expenses. These were partially offset by higher store hourly payroll costs and store operating costs related to HVAC repair costs. On a GAAP basis, SG&A expense for the Family Dollar segment increased $398.7 million. The increased amount was due to 9 additional weeks in the second quarter of 2016 when compared to the second quarter of 2015. SG&A expense for the Family Dollar segment as a percent of sales was 23% compared to 22.5% in the prior year's full quarter. The current year includes $18.7 million for favorable lease rights amortization and $5 million in additional depreciation for useful life and fixed asset revaluation. The prior year's comparable period included $7.5 million of acquisition-related costs, $6.5 million for favorable lease rights amortization and $6.5 million for useful life and fixed asset revaluation. Excluding these costs, SG&A expense increased 10 basis points as a percent of sales to 21.8% from 21.7% in the prior year. The increase was primarily driven by increased store payroll, incentive compensation, advertising costs and repairs, partially offset by lower business insurance costs and lower utility costs. Operating income for the combined organization increased to $357.2 million compared with $123.4 million in the same period last year. Operating income margin increased to 7.1% for the quarter from 4.1% in last year's second quarter. The increase included an incremental $189.7 million related to the additional 9 weeks of operations for Family Dollar in the second quarter of 2016. Operating margin -- operating income margin for the Dollar Tree segment improved 110 basis points to 11% when compared to the prior year quarter. Excluding $16.5 million in acquisition-related costs from the prior year quarter, operating income for the Dollar Tree segment improved 30 basis points to 11% compared to 10.7% of sales in the prior year's second quarter. On a GAAP basis, operating income for the Family Dollar segment increased $189.7 million to 3.6%. Excluding the $1.9 million of inventory step-up amortization, the $18.7 million for favorable lease rights amortization and the $5 million in additional depreciation for useful life and fixed asset revaluation, operating profit margin for Family Dollar in the quarter was 4.6%. In the prior year, the Family Dollar segment incurred an operating loss, primarily as a result of markdowns related to SKU rationalization and planned liquidations of non-go-forward merchandise. Nonoperating expenses for the quarter totaled $87.3 million, which was comprised primarily of net interest expense. Our effective tax expense rate for the second quarter was 36.9% compared to a tax benefit of 31.1% in the prior year's quarter. The increase was primarily attributable to a pretax loss for the second quarter of 2015. For the second quarter, the company had net income of $170.2 million or $0.72 per diluted share compared to the reported net loss of $98 million or $0.46 per diluted share in the prior year's quarter. Combined cash and cash equivalents at quarter end totaled $1.1 billion compared to $1.3 billion at the end of the second quarter of 2015. Our outstanding debt is approximately $7.3 billion. Inventory for the Dollar Tree segment at quarter end was 15.1% greater than at the same time last year, while selling square footage increased 10.4%. Inventory for selling square foot increased 4.3%. We believe that 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 1.5% from the same period last year and decreased 2.2 -- and increased 2.2% on a selling square foot basis. We're 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 $180 million in the second quarter of 2016 versus $100.1 million in the second quarter 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 and remodels, including fee development stores, our rebanner initiatives, the addition of frozen and refrigerated capability to approximately 400 Dollar Tree stores, IT system enhancements and integration projects and our distribution center projects. Depreciation and amortization totaled $161.9 million for the second quarter. This includes purchase accounting-related costs of $18.7 million for the favorable lease rights amortization and $5 million in depreciation for useful life and asset revaluation. Depreciation expense was $89.5 million in the second quarter of 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 2 items, which are included in our guidance. First, it includes $13 million all in the first half of fiscal 2016 of depreciation above the historical run rate for Family Dollar as a result of harmonizing the depreciable lives accounting policies of the 2 companies and the increase in the value of the assets based on the purchase price allocation. Secondly, it includes $18.4 million for Q3 and $74 million for fiscal 2016 for the amortization of favorable lease rights for the purchase accounting evaluation of Family Dollar leases. Our updated outlook for fiscal 2016 includes the following assumptions. Our same-store sales calculation excludes Family Dollar stores and excludes stores that are rebannered. The acquired stores will be included in our same-store sales calculations as of the beginning of our fourth quarter of 2016. In 2016, the last 2 days of October, our biggest Halloween sales days, shift into our fourth quarter. We reflected this shift accordingly in our sales guidance. There are 2 additional days between Thanksgiving and Christmas in 2016. 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 rebanner strategy analysis and our outlook for same-store sales. We have budgeted lower diesel fuel and import freight costs than a year ago. Interest expense will be approximately $88 million per quarter in Q3 and Q4. We are currently reviewing opportunities to refinance our current debt structure given market conditions in the debt capital markets. Our guidance does not include any effect of potential reduced interest expense or noncash charges for deferred financing fees to be written off if a transaction is consummated. Any material changes would be communicated via an 8-K upon closing of a transaction. Our updated full year guidance now includes an estimated impact of $0.03 to $0.04 per share related to the FLSA change and overtime regulations, which takes effect in December. Our guidance incorporates the costs and synergies from our corporate restructuring related to merger integration that was announced on August 4. 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 29.9% for the third quarter and 33.7% for fiscal 2016. The lower rate in Q3 is the result of the state of North Carolina lowering its corporate income tax rate from 4% to 3%, beginning January 1, 2017. The company estimates this change will decrease its deferred tax liability and decrease its tax expense. The company expects to recognize a onetime tax benefit of approximately $20 million or $0.09 per share in Q3 of fiscal 2016. Weighted average diluted share counts are assumed to be 236.4 million shares for Q3 and for the full year. For the third quarter, we are forecasting total sales to range from $5.02 billion to $5.10 billion and diluted earnings per share on a GAAP basis in the range of $0.76 to $0.82, which includes the expected onetime tax benefit of $0.09 per share. These estimates are based on a low single-digit same-store sales increase and year-over-year square footage growth of 2.5%. For fiscal 2016, we are now forecasting total sales to range from $20.69 billion to $20.87 billion compared to the company's previously expected range of $20.79 billion to $21.08 billion. The company now anticipates net income per diluted share on a GAAP basis for full year 2016 will range between $3.67 and $3.82. This compares to our previous EPS guidance range of $3.58 to $3.80. These estimates are based on low single-digit same-store sales increase and a 4% square footage growth. I'll now turn the call back over to Bob.
Bob Sasser:
Thank you, Kevin. And again, I'm pleased with our overall performance for the second quarter, and I'm extremely proud of our combined Family Dollar and Dollar Tree teams. They have accomplished extraordinary feats in a very short time. Just over a year since closing, we've cleaned up the Family Dollar inventory and the stores. The business has stabilized and is showing signs of long-term fundamental improvements. We have successfully launched and are testing the results of our first co-banner DC in St. George, Utah, and we continue to make progress on our systems integration and development of our shared-services model for support functions.
We have great confidence in our ability to deliver at least $300 million in annual run-rate synergies by the end of year 3, and I believe we can exceed these expectations. These synergies will be achieved through a combination of lowering costs in both direct and indirect sourcing, banner optimization, logistics and overhead. 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 [ph] 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. The Dollar Tree business model continues to grow and improve. It is powerful, flexible and more relevant than ever, providing extreme value to customers while recording record levels of sales and earnings. Our model has been tested by time and validated by history. For 34 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 the state of the economy. While our price point remains $1, our operating margin continues to grow and lead the discount sector. Our history of performance continues. In the second quarter, Dollar Tree banner sales increased 8.5%, same-store sales increased 1.2% and operating margin improved to 11%. Over the past 3 weeks, I have attended and presented at our Family Dollar segment's Annual Leadership Conference and our Dollar Tree segment's Annual Field Management Meeting. I really like what I see. Our field management and leadership teams are talented, experienced, energized and incredibly motivated. It's a great time to be Dollar Tree. Operator, we are now ready for questions.
Operator:
[Operator Instructions] We'll go first to Peter Keith with Piper Jaffray.
Peter Keith:
On today's announcement from one of your competitors, it's noted that there's been some headwinds from food deflation and food stamp participation rate reductions and even some competitive pressures. I wonder if you could frame that up with the Dollar Tree versus the Family Dollar segments. I assume Dollar Tree might be a little more sheltered from those. And if so, maybe perhaps talk about if you're seeing any impact on the Family Dollar segment regarding those dynamics.
Bob Sasser:
Yes. Thanks for the question. We are a little more sheltered, I think, than the other segment. Our SNAP, our food stamp penetration, is fairly small to begin with, especially in the Family -- or the Dollar Tree segments. So it's less than 1 -- less than 5%. So there has been some impact there on that food stamp and SNAP across the banner, but it really is a small piece of our business at Dollar Tree. Gary, you have a comment on Family Dollar?
Gary Philbin:
Certainly, at Family Dollar, food stamp penetration runs higher than Dollar Tree. It's still under 5%, I would say, during the quarter. We were relatively flat, and with the exception of that last week in July, where we really lost first-of-month money, was probably the only dip we saw in a particular week. Certainly, customers -- our customers at Family Dollar are still under pressure. They do respond. So for us, I frame it up -- our opportunity is just being ready on first-of-month with our customer, and that's really our focus.
Peter Keith:
Okay. And then maybe a follow-up on that. How should we think about the Family Dollar same-store sales growth once it enters the comp base in Q4? Do you think it's going to be accretive or dilutive or neutral?
Kevin Wampler:
Yes, within our guidance that we've given, it's basically neutral. It's the way we would plan it and the way it's built within the guidance. So -- and again, it'll take effect in Q4, and it'll be -- and we'll look forward accordingly then.
Operator:
We'll go next to Vincent Sinisi with Morgan Stanley.
Vincent Sinisi:
Just to follow up on the Dollar Tree kind of comp reporting structure once 4Q comes around. Should we expect one consolidated number? And then what level of detail between the segments do you expect to give going forward?
Kevin Wampler:
Yes. The expectation is there will be a consolidated number, but there will be indications for the segments as well. So I think it'll be the best way for -- to get the benefit of both worlds, so to speak. So it is one company at the end of the day, one reporting entity, but obviously, we do segment report as well.
Vincent Sinisi:
Okay, Kevin. Just one quick follow-up. I know in the press release you noted kind of continues to be a challenging sales environment. Can you give any specific commentary on have there been any changes more recently and in particular, as I'm sure we're all asked on this call, kind of any notable change from Walmart, specifically?
Bob Sasser:
Vincent, what we're looking at is it is a fairly challenging retail environment, really based on looking at the consumer. We still believe the consumer is under a lot of pressure. There's been a lot of talk about lower gas prices, which over the past year, I guess they're lower, they seem to pop up and down here and there. But the consumer is still seeing a lot of pressure on cost increase with rent and just food and health care and taxes and all the things. So we see them as still being under pressure. I think that's the #1 issue that we see out there. Gary mentioned the calendar shift that put first-of-the-month money into the next quarter. That was an impact we saw in both banners, especially in the Family Dollar banner. In the Dollar Tree banner, we experienced a little more cannibalization than we typically do, so we called that out. But basically, it's just mostly driven by the consumer. We are watching the competition. Retail is a very competitive -- as we all know, a competitive business. We watch what they do, and we react accordingly with prices or with -- sometimes learning what others are doing, it helps us along the way, too. So we're looking at the competition. We're shopping our prices throughout the quarter. We shop the full book at -- once per quarter and the key items throughout the quarter. So we're keeping up with that. I can't tell you that that's been the -- an issue anymore, though, for us than it usually is.
Operator:
We'll go next to Joseph Feldman with Telsey Group.
Joseph Feldman:
Wanted to ask one quick question about that shift of August into the third quarter, like if you excluded that, would the Family Dollar comps been positive? Or it just would've been a little less negative than it ended up being?
Bob Sasser:
Well, we won't know because you can't really do it. But I think it would have been -- it would have shifted it to that positive area. But you never know. It is a big deal in both banners, the first-of-the-month, that's why we talk about being first-of-the-month ready. It is especially a bigger -- it's much bigger in the Family Dollar business, I believe, because of the more needs based. About 70-some percent is needs-based product in the Family Dollar. So when you shift that first and the third of the month when the money is out there for the lower income, the entitlements and all of that, then that does make a difference -- big difference.
Joseph Feldman:
Got it. And then as far as the -- some of the efforts on the Family Dollar side, I know -- thank you for the update on where you are, but I guess, I was just kind of thinking, from a -- maybe if you could share in sort of a baseball metaphor or something like where you guys are on some of those various issues in terms of innings or like -- I know it's still early on a lot of it, but are some a little more middle innings versus haven't even begun the game? Or...
Gary Philbin:
Joseph, this is Gary. I'm not sure it's a baseball game, so I'm not sure I want to say the inning because I think what we're really playing down is a foundation of long-term growth. And for us, that's maybe more around how we think about the elements that we know we have to fix in the business. So the table stakes in my mind are the elements that our customers going to give us credit for in the long term. So customer engagement in our stores, cleaner stores, in-stocks, those are some of the things we just have to do along with some of the facilities that had deferred maintenance. So there's certainly those things that don't necessarily give you a credit on sales, but you just have to do. But our ability to really get our folks focused on really landing on those elements are most important. So maybe it's not a baseball game. Maybe it's polo where -- and we're in the second chukker. I'm not sure. So we have an opportunity here just to build the business based on the foundation of what is most important to our Family Dollar customer. Those things are what our customers will give us credit for. It's what we're focused on. It's what we plan around on first-of-month, so when we talk about being first-of-month and weekend-ready, we've got to improve and gain consistency with our customers that we have the items that are in-stock, what they need, at a fair price. And that's really the architecture we're building Family Dollar around for long-term success.
Joseph Feldman:
Got it. And if I could just sneak one more in before I leave. Consumables was a little softer than discretionary. I'm curious as to was there anything behind that? It's different from what we hear from a lot of the other retailers.
Bob Sasser:
Well, first of all, the -- that shift to first-of-the-month, a lot of that is consumable products. So when we shifted that into the next quarter, I think that impacted it greatly. The other thing is we're having some really great seasonal and variety efforts in our Dollar Tree segment. The merchandise has just been terrific. The value in our variety merchandise continues to get better. When I pointed out that for 30 years, the price has been $1, but our values are better and our margin -- and our initial mark-up continues to increase, that's true. Our buyers are doing a terrific job in sourcing, and couple that along with some favorable freight rates, ocean freight and/or transportation costs in the U.S. and we really are getting greater value in our variety merchandise, still at a $1 price point. And by the way, a little higher margins. So I attribute it to terrific merchandising and our -- especially in the Dollar Tree variety segment.
Operator:
We'll go next to Stan Binder (sic) [Dan Binder] with Jefferies.
Daniel Binder:
Actually, it's Dan Binder. My question was around Family Dollar as well, and you commented that the synergy goals maybe ultimately exceeded. I'm just curious, as you're a year into this, where do you think the upside is going to be? Is it in vendor leverage? Is it in supply chain? And then on the topic of pricing, obviously, you've been calling out more value with smart ways to save program. I'm just curious what you're doing with pricing at Family Dollar more broadly across the store and how much you've had to invest in price since you've taken it over?
Bob Sasser:
I'll let Gary -- this is Bob. I'll let Gary speak to the Family Dollar. But to the synergies, we're very pleased with where we are on the synergies going forward. I think I've said this before that I would be disappointed if we couldn't beat the $300 million. I haven't quantified that, I'm not ready to do that right now. But we are well on track with that. There are still terrific opportunities in our indirect spend. There's just more there to be done. There's a lot more to be done in our supply chain. That's a big cost, a big expense, and we're really -- the supply chain team is really doing some great work right now. That requires technology support, technology integration and some other things. It takes just a little longer. But the payback on the supply chain is going to be very strong as we go forward. Gary, if you'd like to...
Gary Philbin:
Dan, here's -- on the pricing question, here's how we're thinking about it. There is sort of the science and the art. The science is obviously knowing what the rest of the world is doing, so we understand that very well monthly as we go through. I'd say the art of it, and here's what's important for us at Family Dollar, first-of-month is obviously very important for us. What I've learned over my time there is the items that we have to be ready for on first-of-month and the value equation we have to have on end caps, that's where we're focused on making sure our customer sees one of our smart ways to save. It can be Dollar items. It can be private-brand items that are tied-in to a great value on a national brand end cap. Our ability to have cleaned up end caps now gives us the opportunity to do some of those things where we were not able to a year ago. Up and down the aisle, we want our customers to see a promise of great everyday low price. We want to make sure we're calling out our Dollar well. We've added a couple hundred Dollar items over the past year, but this is not about converting a Family Dollar into Dollar Tree. We have a great private-brand program that we're polishing up and enhancing. We want to make sure that on sale, we have the right national brand items in our ad that are driving traffic. So it's not just one tool we're using. We want to certainly be competitive as we measure the competition. But really, for our customer at Family Dollar, we have to really knit all those things together that we're describing in smart ways to save to execute very well around first-of-month, but then the balance of the month as well. Our customer shops differently at the end of the month than the beginning of the month. It's really something that I think is unique to Family Dollar, with the customer base we serve. We're getting smarter on how they respond on both promotions and then what we show in store. So that's the work that we're working very hard to get smarter on and improve our sales trajectory out with [ph].
Daniel Binder:
And just as a follow-up on the supply chain. Can you give us a little bit color on what that schedule looks like from an integration standpoint? I know you've had this rebannered DC up in St. George that's up and running. But just in terms of the rest of the integration activity, what's involved and how long that will take?
Bob Sasser:
Yes. We're still working through a lot of that. Again, the -- we've got 2 WMS that both work really well. We are integrating those 2, though. That's going to take some time. We're also looking at engineered standards and doing a lot of work, and especially in the Dollar Tree banner, as we bring these 2 companies together on engineered standards. So a lot of foundational work is being done right now with 22 distribution centers. So the idea of planning for capacity needs as we're continuing to grow is a high priority. So we're spending time on what do we need going forward based on our growth, number one. And number two, the integration and how do we put these 2 banners together to better serve not only the new growth, but also the existing businesses. So lots of things are going on with St. George. It was the first one. It's only been a couple months, few months. I think June, I guess, is when we brought that up. And there's some refinements that they're in process of doing on that. But we have been able -- we've done the hard work of integrating and shipping both banners out of one distribution center. That gives us the ability going forward to take advantage of capacity and the system no matter where it exists by using it for both banners. It gives us the ability to reduce our stem miles in the future. So that we -- if we can deliver both banners out of the same DCs, then certainly, we can get the best stem miles. So there's a lot of payback there, but it is taking a little time on integration because of technology. We're continuing to grow, and we're not going to miss anything there. We still have to continue to provide capacity as we continue to grow. And frankly, the engineered standards work that we're doing is really, really important to us as we go forward and combine these 2 banners and combine these 2 networks, doing it the most efficient way and reducing cost per building is a big idea. So we're working really hard on it. The time line is still a little bit in flux. I will tell you that we're going to probably -- I'm sure we're going to beat our synergy estimates on the supply chain in the 3 years as we said. I can't tell you how much.
Operator:
We'll go next to Alan Rifkin with BTIG.
Alan Rifkin:
Bob, as a follow-up to the $300 million synergy goal that you expect to exceed, you had, in earlier calls, talked about year 1 synergies, which we are now past, being $75 million. Can you maybe provide some commentary relative to the $75 million as to what you realized in the first full year?
Bob Sasser:
I would say we're hitting and exceeding expectations. We're -- there's a lot more to be done and more than, as I said early and also in earlier calls, that I'd be disappointed if we couldn't exceed the $300 million. The work is being done right now. There's a lot of opportunity there. As I said earlier in this call, the indirect spend is a huge opportunity for us as we get into all the things that we don't sell but that we use in the business and using the power of the combined companies to improve our buying and leverage on that is going to be a big extra. So I'm excited about our goals and exceeding our goals, and we're on target. So that's [indiscernible].
Alan Rifkin:
Okay. Fair enough. You also basically raised the midpoint of your earnings guidance by $0.05, $0.055 with the new guidance today, including the $0.03 to $0.04 impact from the overtime rule going into effect December 1. You did this at the same time that you lowered revenues and basically kept the comps consistent at low single digits. How should we view the incremental increase to earnings? Is that coming from better performance at the core Dollar Tree chain? Is it coming from a result of greater synergies that you're expecting in the second half of the year or better performance at Family Dollar? If you could maybe just provide a little bit color on the delta resulting in the higher earnings today.
Kevin Wampler:
Sure, Alan. This is Kevin. And so a lot of moving pieces right now, as you're well aware. And we talked about the fact that there is a $0.09 onetime benefit in Q3 related to taxes. And so that's obviously a piece of it. You're right. FLSA is now in the guidance, and so that's $0.04. We got some -- we've got some restructuring charges from our announcement from August 4 that are in there as well. But there are -- the rest of it, I guess, I would tell you, there are some pluses and minuses, right? So we took -- obviously, sales came down based upon trends. We did say earlier this year that we expected the synergies to be more impactful in the second half of the year, so there is a piece of that. We are seeing both banners -- we talked today about the fact that we've seen higher mark-on and lower transportation costs and probably a little bit better than what we had probably originally anticipated. So -- and again, I feel pretty good about the fact that even on a one comp, food [ph] basically leveraged our SG&A during the quarter. So again, we're keeping our mind and our eyes on the expenses and managing them well. So a lot of moving pieces. But I think that kind of gives you kind of the backdrop as to how we're thinking about it.
Operator:
And we'll take our last question from Scot Ciccarelli with RBC Capital Markets.
Scot Ciccarelli:
Two questions, actually. First, Kevin, given the commentary regarding the overtime rules, is that the kind of figure we should just annualize? Or there's more to labor in 4Q, so you can't really think about that on an annualized basis, number one. And number two, given the timing of the purchase of Family Dollar last year and your historical kind of forward ordering pattern, should we expect to see more meaningful changes to the Family Dollar merchandise offering as we roll into 4Q?
Kevin Wampler:
I'll speak to the first. I'll let Gary speak to the second. But as far as FLSA, again, when we spoke to it last quarter, we said $0.03 to $0.04, and it was not included in our guidance. And again, the rules had really just come out the week prior to that, I want to say. We continue to believe $0.03 to $0.04 is the right number. And you're right, it's not -- you don't just take that number and annualize it. December is by far the biggest affected period of time. It is the period of time when, as you can imagine, our stores are very, very busy, requires our managers to work a lot of hours. And we, obviously, have to take that in consideration. So obviously, we're testing some things right now in our stores as to how we'll address this. It is a bigger effect on a dollar basis in the Family Dollar banner than the Dollar Tree banner. The Family Dollar banner has historically been more of a full-time employee model versus the Dollar Tree model, which has been more part-time staffing. And so things there we'll be looking at. But -- so you can't annualized it, and I think what we'll look to do is we'll learn, as we go through the fourth quarter, we'll be able to give a better product indication as to what we really believe the full year possibilities are after we get through the fourth quarter. But I wouldn't say annualization is the right way to go.
Gary Philbin:
Scot, Gary. Let me just comment on the fourth quarter and what's ahead of us. We're excited about the fourth quarter, and so when you talk about the assortment changes, I mean, each year, we go through the line reviews. And of course, last year, Christmas had been bought, so we went into the holiday with what we had. I don't know how I would color major changes or not. I think we refined what our customers have the need for and also the wants for as we go into the fourth quarter. I think we have a great opportunity at Family Dollar to really win the holiday. We just had our entire field team in to show off the product and assortment that's geared up really from October through Thanksgiving through Christmas. So merchandising energy that we often had talked about in the past at Dollar Tree, that translates pretty well into Family Dollar, too. It's just that customers come to us for different reasons, and we're going to take full advantage of that at Family Dollar as we go into October, November, December. I think you'll see [indiscernible]
Scot Ciccarelli:
Gary, I know that you've maintained separate ordering groups and merchandisers, et cetera, for Dollar Tree and Family Dollar. But would you say that -- is it the third quarter or the fourth quarter? Or when would you say that you were kind of starting to see more of a consolidated effort in terms of how you're trying to merchandise, like a little bit more, call it, oversight on the Dollar Tree side?
Gary Philbin:
On the Dollar Tree? I'm not sure I follow.
Scot Ciccarelli:
No, just in terms of like you're sitting in your seat, right, and you're going to have more impact and more influence regarding what's showing up in the stores. You've obviously made some tweaks at the margin, but I would think that there's going to be more meaningful changes the longer you're kind of in that seat and you kind of reorganize how you want to merchandise the stores.
Gary Philbin:
I'm not sure I 'm going to have a date for you, Scot, that you're going to be able to go in and see a brand-new store. It is a continual refinement of the assortment, test and learn. You're going to see things change over time by assortment and ultimately in the store. But I'm not here to give you a date where you're going to see something that went from one assortment that dramatically changes to something else.
Operator:
At this time, I'd like to turn the conference back over to Mr. Guiler for any additional or closing remarks.
Randy Guiler:
Thanks, Melanie. Thank you for joining us for today's call and for your continued interest in Dollar Tree. Our next quarterly earnings conference call is tentatively scheduled for Tuesday, November 22, 2016. Thank you, and have a good day.
Operator:
That does conclude today's conference. We thank you for your participation. You may now disconnect.
Operator:
Good day, and welcome to Dollar Tree, Inc.'s First 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.
Randy Guiler:
Thank you, Lauren. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the first quarter of 2016.
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 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. These are included in our most recent press release, most recent 8-K, most recent Form 10-Q and Annual Report on Form 10-K, which are on file with the SEC. We have no obligation to update our forward-looking statements, and you should not expect us to do so. 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.
Bob Sasser:
Thanks, Randy. Good morning, everyone.
This morning, we announced Dollar Tree's results for the first quarter of fiscal 2016. Total sales for the quarter increased 134% to $5.09 billion. And same-store sales on a constant currency basis increased 2.3%, driven by increases in both traffic and average ticket. Adjusted for the impact of Canadian currency fluctuations, the same-store sales increase was 2.2%. Total sales results were at the midpoint of our range of guidance. Operating income increased 80% to $418.7 million. Net income for the quarter increased 235% to $232.7 million. And earnings per share increased 188% to $0.98, which exceeded the high end of our first quarter range of guidance by $0.15. I'm very pleased with our company's accomplishments for the first quarter. Sales were solidly within our range of guidance. SG&A expenses across both banners were well-managed. Our Dollar Tree segment operating margin improved 60 basis points to 11.8% for the quarter, and our Family Dollar segment first quarter operating margin improved to 5.1%. Diluted earnings per share of $0.98 were $0.15 above the top end of our range of guidance. Excluding a $0.09 benefit from our lower-than-planned tax rate for the quarter, earnings per share were $0.89, which exceeded the top end of our range of guidance by $0.06 per share. Looking ahead, we have an incredible opportunity to increase shareholder value as a combined organization. Our integration of Family Dollar is on schedule, and the strategic rationale for the combination is as compelling as ever. As progress on our retail operation continues, there's an increased enthusiasm for the opportunity this merger presents to grow our business and to serve more customers in more ways. We are employing a disciplined approach to building the foundation for long-term improvements and the customer experience at Family Dollar, and we remain confident in our ability to capture synergies for the combined organization. With a focus on managing our business in real time, we're developing the foundation for a larger, stronger and more diversified business that will generate cash and build shareholder value for years to come. Accomplishments continue to grow in the first quarter. In the Dollar Tree segment, sales increased 9.5%, and same-store sales on a constant currency basis increased 2.3%. Sales increased as the result of growth in both basic consumables and discretionary products and through increases in both traffic and average ticket. Top-performing categories included household products, candy and food, snacks and beverage and party supplies. Geographically, Dollar Tree same-store sales growth was strongest in the Mid-Atlantic, followed closely by the Midwest and the Northeast. I'm pleased with the consistent growth and strength of the Dollar Tree business. This represented our 33rd consecutive quarter of positive same-store sales. Cycling comp's up 3.4% last year, and through a volatile period for retail, our first quarter results again validate the relevance of the Dollar Tree brand. Customers are shopping our stores more often, and we continue to attract new customers every day. And when these customers are in the store, they're buying more. Both traffic and average ticket contributed to our comp growth. Dollar Tree continues to be part of the solution for millions of consumers as they work hard to balance their household budgets. We serve a very loyal and growing customer base. Our commitment is to continue serving our existing customers better while taking every opportunity to gain new customers in every store every day. Our merchant teams continue to do a terrific 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 first 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. Seasonal energy was high throughout the quarter, beginning with Valentine's Day. In addition to party essentials, our stores were well-stocked with cards, gifts, gift bags, balloons, party supplies and candy for that special person. Seasonal sell-through was good, and stores quickly and efficiently transitioned to St. Patrick's Day and Easter. The red seasonal displays from February quickly turned green in early March with hats, necklaces, socks and party supplies in preparation for St. Patrick's Day. And for Easter, our customers found jellybeans, Easter bunnies, fashion accessories, chocolate candy, baskets and basket stuffers, everything necessary to build colorful, cost-effective Easter baskets for the kids. We continue to invest in our customers by offering high-value product. In addition to the seasonal energy in the first quarter, our 30-year anniversary event emphasized unbelievable values on many name brand Bonus Buys, especially in our food, snack, beverage and household supplies, tremendous values and all priced, as it has been for the past 30 years, at just $1 per item. And not to forget the basics throughout the quarter, we highlighted our million-dollar brands with signing and special displays of these every day items that provide great values to our customers, especially to meet their spring cleaning and spring decorating needs. We ended the quarter with our inventory clean, well-balanced, seasonally relevant and stores prepared for Mother's Day, Memorial Day and Summer Fun. 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 businesses through opening more stores and increasing the productivity of all of our stores. In the first quarter, we opened a total of 112 new Dollar Tree stores. We relocated or expanded 25 Dollar Tree stores. We rebannered 126 Deals stores to Dollar Tree stores. And we rebannered 3 Family Dollars to Dollar Tree stores for a total of 266 Dollar Tree projects during the quarter. Total Dollar Tree banner selling square footage increased 10.4% compared to the prior year, and we ended the first quarter with a total of 6,049 Dollar Tree stores across North America.
Additionally, I am pleased to report that since quarter-end, we have successfully completed the rebannering of all of our Deals stores. As a reminder, 210 Deals stores were converted to Dollar Tree stores, 9 were converted to Family Dollar stores and 3 were closing as their lease term expired. Going forward, all of our resources and efforts will be dedicated to our 2 primary growth banners:
Dollar Tree and Family Dollar.
In addition to new stores, we continue to execute our strategy to improve the productivity of our existing stores. Our drive-the-business initiatives include, number one:
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. Number two, a fun and enjoyable shopping experience with a focus on seasonal relevance. Our storefronts change with the seasons. At Dollar Tree, we want to own the seasons at the $1 price point. Number three, creating merchandise energy and the thrill of the hunt throughout the store. At Dollar Tree, you always find an unexpected value. And number four, 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 expanding our frozen and refrigerated category. In the first quarter, we installed freezers and coolers in 118 additional Dollar Tree banner stores. We currently offer frozen and refrigerated product in 4,405 stores and growing. Our plan is to expand frozen and refrigerated to 400 additional stores in 2016. We continue to support planned growth with infrastructure and appropriate distribution capacity ahead of the need. I'm pleased to announce that construction on our newest DC -- that would be Dollar Tree DC #11 in Cherokee County, South Carolina, was completed on schedule and on budget. This 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 U.S. We are currently receiving product at this facility and will begin shipping to stores from this new facility this quarter. Additionally, to support continued growth in Western markets, we are expanding our Stockton, California distribution center from 525,000 to 820,000 square feet. This project is nearing completion. And we're making meaningful progress in the Family Dollar banner. Less than 1 year into our integration, the stores are cleaner, the shelves are better stocked, we've 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. For the quarter, the Family Dollar banner delivered a low single-digit positive comp store sales increase. The same-store sales increase was driven by increased traffic, partially offset by a slight decline in average ticket. Same-store sales increased in both discretionary and consumables at the Family Dollar banner, with slightly higher comp sales growth in discretionary. The strongest sales increases by month were in February and March, reflecting the Easter shift. Geographically, comp store growth was led by the Northeast and Mid-Atlantic. For the first quarter at Family Dollar, we opened a total of 59 new Family Dollar stores, and we relocated or expanded 41 Family Dollar stores for a total of 100 projects. During the quarter, we rebannered Family Dollar stores -- 3 Family Dollar stores to Dollar Tree, and 6 others were in the process of conversion at quarter-end. Additionally, 9 Deals store locations were converted to Family Dollars. We ended the first quarter with 7,948 Family Dollar stores. We're well on our way to achieving our announced Family Dollar store growth of 200 new stores in 2016. At quarter-end, we had a total Family Dollar and Dollar Tree combined store count of 13,997 stores across North America. As in Dollar Tree stores, our primary areas of focus for Family Dollar stores are on the customer, the shopping experience and value creation. 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 and the role of private label products while rationalizing SKUs for increased productivity and a focus on basic in-stock levels. We're pleased with the initial reception and the traction we're gaining with our smart ways to save initiatives. Our goal is to communicate value to our customers. The key elements of smart ways to save are a combination of every day low-price items, strategically planned sales and price drop promotions, incredible $1 wow items and a continually enhanced assortment of name brands, private label, name-brand equivalents and value brands. We're pleased with the Family Dollar traffic trends we experienced in Q1. To win back our Family Dollar customers' confidence and frequency of visit, we are committed to improving their shopping experience.
There's a keen focus on table stakes, including store standards and conditions, where we aspire to offer a shopping experience that is bright, clean and free of clutter. There's a keen focus on the customer experience with a store that is full and in stock, easy to shop, full of product that is of trusted value. There's a focus on merchandise relevance. In the words of the customer, "My Family Dollar has what I need." There's a focus on customer engagement from friendly and informed associates. Importantly, not all of the table stakes initiatives require investment and expense or capital. By identifying and establishing winning retail disciplines and benchmarks, customers are already seeing cleaner aisles with less clutter. Our customer satisfaction surveys continue to reflect improvements in customer scores in each of our 4 primary survey categories:
store cleanliness, product assortment, customer service and speed of checkout. Continued improvements in each of these metrics will contribute to Family Dollar reestablishing itself as the convenience store of choice for our customer 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 costs, leveraging shared service 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. And 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 updated expectations.
Some comments on achieving synergies and delivering great values. 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 onetime costs of $300 million. As a reminder, we have identified synergies in 4 primary areas:
one, sourcing and procurement; two, our rebanner program for optimizing store formats; three, distribution and logistics; and four, overhead and corporate SG&A. At this stage, we are clearly on track to achieve our first 12-months milestone of at least $75 million in run rate synergies.
Now I'll turn the call over to Kevin to provide more details on our first quarter financial performance and our updated outlook for the second quarter and for the full year 2016.
Kevin Wampler:
Thanks, Bob, and good morning.
Total sales for the first quarter grew 134% to $5.09 billion, which includes our third full quarter of Family Dollar sales. This was at the midpoint of the sales guidance range of $5.05 billion to $5.12 billion. Dollar Tree segment total sales increased 9.5% to $2.38 billion, while Family Dollar segment total sales decreased 1.8% to $2.70 billion. Year-over-year sales comparisons for Family Dollar were impacted by rebannered stores and divested stores. Same-store sales on a constant currency basis increased 2.3% versus 3.4% in the prior year's first quarter. The increase was driven by both traffic and ticket. Adjusted for the impact of Canadian currency fluctuations, same-store sales grew 2.2%. All acquired Family Dollar stores and newly rebannered Family Dollar and Deals stores are considered new stores and are excluded from our same-store sales calculation. Gross profit for the combined organization increased 108% to $1.55 billion through the first quarter of 2016 compared to the prior year's quarter. The majority of the $805.7 million increase was driven by Family Dollar's gross profit of $733.8 million. Gross profit for the Dollar Tree segment increased 9.6% for the quarter. Gross profit margin for the Dollar Tree segment was 34.4% during the first quarter, flat compared with the prior year's first quarter. Factors impacting the segment's gross margin performance during the quarter included lower merchandise cost due to favorable freight cost, higher shrink as a result of unfavorable physical inventory results, higher distribution and occupancy cost as a percentage of net sales and cycling the onetime, $2 million, noncash charge from the prior year related to a change in the inventory accounting method for our Canadian operations. Gross profit margin for the Family Dollar segment was 27.2% during the first quarter compared with 25.8% in the comparable period last -- prior year. Excluding the $6.3 million of inventory step-up amortization, gross profit margin was 27.4% for the quarter. The improvement of 160 basis points on a comparable basis was driven by improved mark-on, favorable freight costs and improved shrink, partially offset by higher distribution and occupancy costs. Selling, general and administrative expenses in the quarter for the combined organization increased 120% to $1.14 billion from $516.1 million in last year's first quarter. The majority of the $619.8 million increase related to $595.8 million of Family Dollar expense. Q1 SG&A expense for the Dollar Tree segment as a percent of sales was 22.6%; a 110-basis-point improvement compared to the prior year's quarter. The prior year's quarter included $10.4 million of acquisition-related cost. Excluding the prior year's cost, SG&A improved 60 basis points compared to the adjusted 23.2% of sales for the prior year's quarter. This improvement was driven primarily by payroll-related costs, including lower incentive compensation, health insurance and profit-sharing expense; and improved store operating costs as a percentage of sales related to lower utility costs. SG&A expense for the Family Dollar segment as a percentage of sales was 22.1% compared to 20.8% in the prior year's quarter. The current year includes $18.7 million for favorable lease rights amortization and $7.8 million in additional depreciation for useful life and fixed asset revaluation. The prior year's comparable period included $8 million of acquisition-related costs. Excluding these costs, SG&A expense increased 60 basis points as a percent of sales to 21.1% from 20.5% in the prior year. The increase was primarily driven by increased payroll and incentive compensation, advertising costs and repairs, partially offset by lower business insurance costs and lower utility costs. Adjusted operating income, excluding acquisition-related costs for the Dollar Tree segment, increased $37.5 million to $280.7 million. As a percent of sales, adjusted operating income improved 60 basis points to 11.8% compared to 11.2% of sales in the prior year's first quarter. Adjusted operating income for the Family Dollar segment increased $24.8 million to $170.9 million. The year-over-year comparison was impacted by rebannered stores and the divestiture of 325 Family Dollar Stores. As a percent of sales, adjusted operating income increased 100 basis points to 6.3% compared to 5.3% of sales from the prior year's comparable period. Nonoperating expenses for the quarter totaled $87.1 million, comprised primarily of net interest expense of $87.3 million in the quarter. Our effective tax rate for the first quarter was 29.8% compared to 38.6% in the prior year's quarter. Our Q1 guidance was based on an expected tax rate of 36.6%. The decrease was primarily attributable to a onetime benefit in state tax expense related to the fair market value of assets acquired from Family Dollar, in addition, a tax benefit from adopting ASU No. 2016-09 related to stock compensation accounting and an increase in work opportunity tax credits in relation to income for the quarter. For the first quarter, the company had net income of $232.7 million or $0.98 per diluted share. This includes an approximate $0.09 benefit to Q1 EPS from the lower-than-anticipated tax rate. Excluding this onetime tax benefit and the prior-year quarter acquisition-related costs, diluted EPS improved by 25.4% to $0.89 from $0.71. Combined cash and cash equivalents at quarter-end totaled $929.7 million compared to $736.1 million at the end of 2015. Our outstanding long-term debt is approximately $7.5 billion. Inventory for the Dollar Tree segment at quarter-end was 18.4% greater than at the same time last year, while selling square footage increased 10.4%. Inventory per selling square foot increased 7.2%. The primary contributor to the year-over-year increases in inventory levels relates to the West Coast port disruptions we experienced a year ago. We believe that current inventory levels are appropriate to support scheduled new store openings and our sales initiatives for the second quarter. Inventory for the Family Dollar segment at quarter-end increased 2.2% over the same period last year, increased 5.9% on a per 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 second quarter. Capital expenditures were $175.9 million in the first quarter of 2016 versus $66.9 million in the first quarter 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 or remodels, including 3 [ph] development stores, our rebanner initiatives, the addition of frozen and refrigerated capability to approximately 400 Dollar Tree Stores, IT system enhancements and integration projects and our distribution center projects. Depreciation and amortization totaled $162.3 million in the first quarter. This includes purchase accounting-related costs of $18.7 million for favorable lease rights amortization and $7.8 million of depreciation for useful life and asset revaluation. Depreciation expense was $52.8 million in the first quarter of 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 2 items, which are included in our guidance. First, it includes $5 million for Q2 and $13 million for fiscal 2016 of depreciation above the historical run rate for Family Dollar as a result of harmonizing the depreciable lives accounted policies of the 2 companies and the increase in the value of the assets based on the purchase price allocation. Secondly, it includes $18.7 million for Q2 and $74 million for fiscal 2016 for the amortization of favorable lease rights for the purchase accounting valuation of Family Dollar leases. Our updated outlook for 2016 includes the following assumptions. 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 owned by Dollar Tree or 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 our rebanner strategy analysis and our outlook for same-store sales. Remaining inventory step-up amortization will be approximately $2 million in Q2. We have budgeted lower diesel fuel and import freight costs than a year ago. Interest expense will be approximately $90 million per quarter in 2016. We do not anticipate any share repurchase in 2016. And we cannot predict future currency fluctuations, so we have not adjusted our guidance for changes in currency rates. Please note that our fiscal 2016 outlook does not include any adjustments related to the recent FLSA announcement regarding changes to overtime regulation. The rule change affects a relatively small percentage of our workforce, and our exempt store associates are competitively compensated. We continue to analyze the rule changes as we put our action plans together throughout these changes. As always, we review cost pressures as a variable in our business that we are responsible to manage. Although still early in the analysis of the revised overtime regulations. As of now, our best current estimate is a potential impact of $0.03 to $0.04 per share in the fourth quarter based on the December 1, 2016 implementation date. We will update this information as applicable, as we continue to review and finalize our plans and the associated financial impact. Our guidance also assumes a tax rate of 37.2% for the second quarter and 35.3% for fiscal 2016. Weighted average diluted share counts are assumed to be 236.4 million shares for Q2 and for the full year. For the second quarter, we are forecasting total sales to range from $5.03 billion to $5.12 billion and diluted earnings per share on a GAAP basis in the range of $0.66 to $0.72. These estimates are based on a low single-digit same-store sales increase and year-over-year square footage growth of 2.4%. For fiscal 2016, we are now forecasting total sales to range between $20.79 billion and $21.08 billion compared to the company's previously expected range of $20.76 billion to $21.11 billion. The company now anticipates net income per diluted share on a GAAP basis for full year of 2016 will range from $3.58 to $3.80. This compares to our previous EPS guidance range of $3.35 to $3.65. These estimates are based on a low single-digit same-store sales increase and 4% square footage growth. And I'll now turn the call back over to Bob.
Bob Sasser:
Thanks, Kevin. In closing, I'm very pleased with our first quarter results, and I'm extremely proud of our combined Family Dollar and Dollar Tree teams. They have accomplished extraordinary feats in a very short time.
Less than a full year since closing, we've cleaned up the Family Dollar inventory and stores. The business has stabilized and is showing signs of long-term fundamental improvements, as evidenced by Family Dollar's 5.1% operating margin in the first quarter. We are finalizing the logistics initiatives to begin shipping product from our first co-banner DC in St. George, Utah, and we continue to make progress on our systems integration and development of our shared services model for support functions. We have great confidence in our ability to deliver at least $300 million in annual run rate synergies. By the end of year 3, I believe we can exceed these expectations. These synergies will be achieved through a combination of lowering costs in both direct and indirect sourcing, banner optimization, logistics and overhead. But this is just the beginning. There's much more to do. And I'll tell you that, as always, we will employ a disciplined approach to driving key strategic initiatives to the combined organization through improved communications, 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. The Dollar Tree business model continues to grow and improve. It's powerful, flexible and more relevant than ever, providing extreme value to customers, while recording record levels of sales and earnings. Our model has been tested by time and validated by history. For 33 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 the state of the economy. While our price point remains $1, our operating margin continues to grow and lead the discount sector. Our history of performance continues. In the first quarter, Dollar Tree banner sales increased 9.6%, same-store sales increased 2.2% and operating margin improved 60 basis points to 11.8%. With the addition of Family Dollar, we are a larger, stronger and more diversified business, better able to grow in more markets, while serving more customers with exactly what they're looking for, great value in every store, every day. Our future has never been brighter. Operator, we are now ready for questions.
Operator:
[Operator Instructions] Our first question comes from Matthew Boss with JPMorgan.
Matthew Boss:
Congrats on a great quarter guys. So first question, flattish gross margins at Dollar Tree. You have easier compares in the back half. What's the best way to think about gross margin opportunity as the year progresses? And with that, just on the sourcing outlook for IMU, anything longer-term structurally preventing Dollar Tree gross margins from returning to 2012, which I think was about 100 basis points higher?
Bob Sasser:
Matt, the sourcing opportunities are terrific. They're very favorable right now. There's nothing structurally that stands in our way of increasing our merchandise margins. As you know, in times of favorable buying opportunities, our retail is always $1. So we manage our cost in the market by -- and the value by looking at the cost. So many times, as we get a lower cost, we turn it into better value product to drive more sales, more top line growth. We'll continue to do that. And so I would tell you that our merchandise margin is likely to stay in a consistent range over the past several -- many years, we've performed within a very predictable range. This is -- does seem to be a favorable time for costs, merchandise costs as well as freight rates. So that -- I would factor that into the equation as we look forward. There's nothing standing in our way, frankly, from continuing to improve our margins. I won't tell you what because we do have to sort of follow the customer, and we've got to provide for the customer the great values. And when times are tough, they want more of the things that they need every day. That's their first dollar that they spend. And then if they spend a second dollar, it's on things that are more discretionary. So as we are still in one of those times, where the low-income customers especially are under pressure, we intend to continue to provide great consumer products at Dollar Tree as well as at Family Dollar, and great values for our customers in those projects. And I'll close my long answer to your question, I apologize, but remember that, at Dollar Tree, the margin is as much about the mix of our product than the direct cost of the individual items. So when times are tough, we'll sell more consumer goods. When times improve, we'll sell a little more discretionary goods. Right now, in the first quarter, the mix is as I would have expected it, mainly because of the impact of Easter. Both banners sold a little more discretionary product.
Matthew Boss:
Great. And then just a follow-up on the Family Dollar side. As we think about the top line productivity opportunity at Family Dollar, can you talk to the key to what you've done so far to turn comps from negative to positive low-singles, and just what the drivers would be for the next inflection across the store as we think forward?
Gary Philbin:
This is Gary. Let me sort of describe the basics that we're doing because you go back to really the focus that we have in stores and it's delivering on many of the basics. And when we talk about table stakes, we're talking about some of the facility investments and investments in customer service. So I would tell you the basics that we're also talking about is being ready on first of month when many of our customers have more money in their pocket. It also translates for us into being weekend-ready when our time-crunched customers are coming into the stores. So a lot of the focus, for us, is let's be in-stock. And that comes from the standpoint of making sure the right products are in the right stores at the right time, but more than that, I would say the initiative around having our folks ready to stock the product when our customers are coming to the store. So as we continue to push on the basics, on the backside of course we're taking a look at adjacencies and productivity by department. Those are the things we're working on in a tough environment in many stores to understand how do we continue over the long term to drive productivity into our Family Dollar store. But I would just tell you, we have a lot of upside on delivering on the basics for our customers. They really count on us around the key elements of the month and really delivering on the basics. And if we get that right, that's where we see driving more sales productivity and driving our comp store sales.
Operator:
We'll go next to John Zolidis with Buckingham Research.
John Zolidis:
Fantastic results. Wondering if I could ask kind of some follow-up questions around the Family Dollar integration. Can you talk about the factors that are driving the improvement in the reported gross margin at Family Dollar? And then, also, when we get out and look at the stores, some of them look really fantastic. Other ones need a little bit more TLC. Can you talk about how you're approaching the large store base in terms of which ones you're addressing first and how you're handling personnel within the Family Dollar field team from district managers down to store managers?
Gary Philbin:
John, Gary again. Let me just maybe paint the picture on margin at a high level. We're getting some of the beginnings of the work that we've done on synergy, lots of support from our vendor community. And I would tell you that both merchandising teams got off to a great start on that effort. And a piece of that is trying to show up. Because a lot of those costs have to roll through the inventory flow. So we're trying to get that. But as much as anything, I would say it's a mindful approach to what we're doing with our smart ways to save, what's on sale, what's on price drop, our commitment to EDLP. Those are the basics that allow us to give our customers great values every day, puts a few arrows in our quiver to reach out to them the right way. We've had benefit of a shrink this year, as you might expect, with our efforts to clean up the stores and get down -- get inventory. That's always a plus for every retailer, no exception to us. We've seen that show up. And I would say our discretionary business has been a very bright spot for us, outpacing our consumables this quarter and really translates into really what our teams have brought to bear into our stores really across apparel and general merchandise and our seasonal. We're off to great starts in February and March going to the Easter holiday. So those are some of the things driving the margin and the execution of what we do in-store. I think you've touched on the store base, exactly the big opportunity we saw and what really made us think this is a big idea. And I would tell you, I'm not satisfied across all 8,000 stores. But the opportunity for us, there's no surprises here, how do we focus on it? I would tell you this. We have lots of great stores that sometimes the facilities are old that we can still start to clean them up, keep them well-merchandised. And I just attended a handful of our sales meetings this April with our DM group. And that's really the focus for us to really get everybody on board with the initiatives that we're driving around table stakes. And while we want all boats to rise, and certainly they will, we're really focused on the key stores that are going to drive volume and bottom line contribution. And so across every operating region, down to the district, we've called out those targets to really figure out how do we raise those stores' performance, both being in-stock, the needs we have on a facility basis and the investment that we want to make in-store because it does need to show up to get product under the shelves, customer service. And so we're very focused on that core group of stores here because we can hitch our wagon to that and drive lots of sales and bottom line cash flow. And we continue to preach the initiatives to all 8,000 stores. We'll get there, but this is going to be a journey for us to fix the fleet that we have.
Operator:
[Operator Instructions] Our next question comes from Michael Lasser with UBS.
Michael Lasser:
Bob, you've consistently said that you think the $300 million in synergies is conservative, and you expect upsides to that over time. If you are going to outperform that expectation, when do you think that will start to show through? Is it not going to be until the third year that you might realize the upside?
Bob Sasser:
We're finding opportunities along the way. As Gary said, it's sort of a journey. And we started this journey with a $300 million target that we've -- through a lot of work and analysis and getting under the covers, we found the $300 million. Internally, we have a higher calling, though. And as we are getting into operating the business day-by-day, we're always looking at improving it. We're finding additional ways to improve. A lot of them are -- to your timing question, a lot of them are going to be dependent on IS and IT. That is one of the gating factors. We are beginning to get traction on that, but that is going to take some time because some of those things you do have to do in order. In other words, you have to do one before you can get to the other before they can then leverage that to get to the other. So with our IT overall, we have great confidence that we're going to find more pots of gold along the way. Again, we have internal targets that are higher than the $300 million. We're not sharing that because right now, they're aspirational. But I believe that they're there. And the confidence that I would like to share with you is that the $300 million that we have described so maybe eloquently, maybe not, over the past almost 18 months are there. We're confident the $300 million is there. We're confident that we will be able to find more than the $300 million. And as time goes on, we'll be happy to share as we go forward with that.
Michael Lasser:
And let me ask one quick follow-up. You're getting close to the point at which you launched a distribution center that can serve both Dollar Trees and Family Dollars. Does that make it feasible to be able to take some of the highest and most productive SKUs from Family Dollar that are on the $1 price point and put those into a Dollar Tree?
Bob Sasser:
Well, it's possible, but not -- we won't do that. We have no plans to turn our Family Dollars into -- or our Dollar Trees into multi-price point retail, just as we have no intent to turn Family Dollar into a Dollar Tree single-price point retail. The power in this is in both brands, in operating, in running both brands at a very high level to serve more customers in more ways. And we are keeping all of the things that are customer-facing in each brand separate. We have a separate merchandise team for Dollar Tree than from Family Dollar. There are separate strategies and category initiatives and all that goes with the different customer-facing things. And we're leveraging all the back-office, things that we can leverage with technology and with just support over both banners. So that's how we're thinking about it. The initiative to co-banner the DC and develop the ability to ship all banners from a DC, the first benefit that we'll see from that is our ability to use any excess capacity that we have across the nation for either banner. For example, we now have 21 distribution centers, going on 22 distribution centers. And some are Family Dollar and some are Dollar Tree. Some of our distribution centers are at capacity in one banner or the other, and the other banner under capacity. So if we could ship all banners out of all DCs, then we could more effectively use our capacity without building more capacity because we'd have it in the right place. And also, we can improve our stem miles by being able to do that. That's just one of the opportunities that we have in logistics as we go forward. We'll continue to rationalize the opportunity and look at more ways to become more productive across banners by using and leveraging the same technology.
Operator:
We'll go next to Scot Ciccarelli with RBC Capital Markets.
Scot Ciccarelli:
I guess, this question's probably for Kevin. How should we think about the flow of net synergies during the course of the year? Because if I'm not mistaken, right now, you guys are spending against those synergies. So what we can kind of see in the P&L is still somewhat modest because, again, you're spending against the cost savings. But Gary's already referenced it and, obviously, Michael was asking about kind of the longer term. But just in terms of 2016, how should we think about the flow of those net synergies?
Kevin Wampler:
That's a good question, Scot, and we discussed that a little bit with the first quarter call and the fact that we do see it gaining steam as we go through the year basically. So to Gary's point, some of the merchandise cost synergies will flow in over time as we sell through inventory that we already had on hand. And at the same point in time, we'll continue to work on all the other things that we're working on besides merchandise. And again, some of those -- the indirect procurement-type items will continue to flow and will gain some steam as we get -- especially as we get into Q3 and Q4, I think, is when you start to see a pickup. So that's really the way our guidance has planned it as well. And as we initially said, the costs to achieve the synergies tend to be more front-end-loaded as we go through the process. And so that's not a surprise, and it's really how it's kind of flowing as we sit here today. So that's how we're thinking about it.
Scot Ciccarelli:
That's very helpful. And just a clarification, have the Family Dollar stores started receiving Dollar Tree-ordered merchandise yet? Just thinking of the time line when you took ownership versus your typical 9-month ordering lead.
Bob Sasser:
Well, Family Dollar, we're not ordering merchandise for Family Dollar at Dollar Tree, we are leveraging the exact products and the vendor resources to get the lowest price. So yes, any orders that are placed where we have the same item, and one company had a lower price, now we all have the same price, the lowest price, any orders that are placed against those items, we're seeing the benefit of it now. But that really is going to run through the year as we head off into the future. But we're not buying a Dollar Tree product to put into Family Dollars, nor is Family Dollar buying product to put into Dollar Trees.
Operator:
We'll go next to Stephen Grambling with Goldman Sachs.
Stephen Grambling:
So you slowed the Family Dollar rebanner process a bit as the Deals banners were converted, but maybe if you can just comment on what you're seeing from those FDO rebanners relative to your initial expectations in the base Dollar Tree business. And then as a follow-up, should these rebannered locations see sales and profit ramp-up similar to a new Dollar Tree location?
Bob Sasser:
I'll answer that part of the question first. Yes, we expect these stores to become good Dollar Tree stores. Some of them are becoming excellent Dollar Tree stores. Some of them are becoming okay Dollar Tree stores, just as it is with a new store fleet. But our early indications, and look, we haven't had anything older than, what, 7 months. But early indications on the rebanner is that it's, first of all, our margins go up substantially when we rebanner to a Dollar Tree. The sales are -- it's, on average, we like the total sales. We have some stores that are outperforming what we expected and some that are underperforming. So if you look at the average, we're where we need to be. So one of the things we're continuing to do is look at the performance and marry that back up to the analysis and look at, what makes a great Family Dollar to Dollar Tree? What's the best? And where do those fall? And how can we improve this process? So we're going to do approximately 100 more this year. The -- again, we took a short break on the rebannering early on to get the Deals stores rebannered. And now we've completed that project, so we're back onto the Family Dollar. But we're also looking at the performance and what we can do. As always, at Dollar Tree, we're looking for ways to improve the performance of our rebanners.
Stephen Grambling:
And so one follow-up on that. Can you just comment on maybe what the average profitability was of the Family Dollar locations that were first rebannered and maybe how that might compare to the ones that you'd be identifying going forward?
Gary Philbin:
I think the only metric we've really given around this is in the sense of what -- you can do the math and do what an average Dollar Tree store, which is roughly $150,000, as I remember it. So I think that's really the only metric. We didn't give any of the former FD information. And so that just is the metric we've given at this point.
Bob Sasser:
Thanks. And high level, though, Stephen, we're looking at maintaining the sales and improve in the margin when we rebanner from a Family Dollar to a Dollar Tree. So that's sort of the way we're looking at it. And single-price point versus a multi-price point, if we can do the same sales or a little better -- a little better is better, and improve the margin lots of basis points, then we've got a real opportunity here.
Operator:
We'll go next to Denise Chai with Bank of America.
Denise Chai:
Could you talk -- so you mentioned from a comp perspective February and March were better than April. Did you see anything in April besides the Easter shift from a consumer perspective?
Bob Sasser:
I think you can characterize the first quarter as the shift of Easter and a cold, rainy, damp spring. And that's pretty much -- Easter shifted 2 weeks earlier. So you've got more sales in February and March because of the early Easter. And then one week in March, you lost the impact of Easter that you were up against from last year. And then the first week, you lost the other. And then you had a couple of weeks after that, that were just really lousy weather, frankly, for those new spring goods that we had now changed our stores over to. So that's sort of the cadence. That's what I saw in April. It was really just the cold spring weather, and we lost a lot of the Easter sales into March.
Denise Chai:
Got it. And just can you clarify a little bit about the cadence of square footage growth, how you get from 2.4% in the second quarter, say, to 4% for the full year?
Gary Philbin:
Yes. I mean, I think what we'll do is we'll be cycling the divestiture that we had to do in the fall, basically. So that's basically how it hops back up, Denise.
Operator:
And our final question comes from Dan Wewer with Raymond James.
Daniel Wewer:
Bob, I wanted to follow up on Scot's question about the potential merchandise changes at Family Dollar after the deal was announced, that you had talked about inventory at Family Dollar not being appropriate for their customer, that you'd be reevaluating SKU-by-SKU and beginning to make changes. Where are we on that process? I would assume that you begin to see significant change in the second half of this year, but I want to get an update from you.
Bob Sasser:
Yes, okay. Well, I think I understand the -- I'm going to turn it over to Gary, but the question from was -- I may have misunderstood it originally. But it was the idea of providing a merchandise assortment that was relevant to the Family Dollar customer and providing more value to the Family Dollar customer by offering them product that maybe fit their price points better. So a focus on opening price point, a focus on some name brand equivalent to private labels, a focus on no-name, just value brands in the stores as well as being competitive, I guess, on the name brand. Gary, would you add more to that?
Gary Philbin:
Yes. I'd sort of go back to the things we're working on, Dan, and it comes around to really a 4-foot by 4-foot walk. So where are we on opening price point across every category? What's the role of private brands, the value brands on every place.[ph] Some of it, quite frankly, is a placement of the merchandising energy that we have in-store. So because we had end caps tied up often with older inventory, we've been able to get that downstroke going, of what does our customer see in terms of fresh goods every month? Over the long run, it's really a question around the right SKUs or that is rationalization or that is the adjacencies of the departments, the flow of the stores. Those are the bigger levers that we're going to pull over the long term. But I give to credit to the energy and confidence our merchandising team has, in quick order, gotten the right items in front of our customers. Our customers shop differently first of the month to the end of the month. And we are going to know this customer better than anybody else in terms of how they shop us and their needs during the course of the month. So that's really our effort right now. The basics of product, price, placement are all the levers that we're working on right now to make sure we're serving our customer well.
Daniel Wewer:
Well, if I were to ask the question this way, if your goal was to increase Family Dollar sales per square foot, let's say, to $210, do you have the appropriate inventory content today? And what's missing is better in-store standards and execution? Or do you think that the merchandise content has to change from here to get to that kind of sales productivity?
Bob Sasser:
Let me answer it this way. I think, at this point, we can get traction by doing some of the basics I've described, and we can get the Family Dollar fleet driving a higher sales productivity. We see it as doable. It's waiting for us to continue to polish it up and get it going. I think over the long run, I think there is more work to be done on driving a higher sales productivity within the 4 walls. Those are some of the things we're testing now, understanding our customer better, to really for the long term understand what this box should look like.
Operator:
That concludes today's question-and-answer session. At this time, I'd like to turn the conference back to Randy Guiler for closing remarks.
Randy Guiler:
Thank you, Lauren, and thank you for joining us for today's call and for your continued interest in Dollar Tree. Our next quarterly earnings conference call is tentatively scheduled for Thursday, August 25, 2016. Thank you, and have a good day.
Operator:
This concludes today's conference. Thank you for your participation. You may now disconnect.
Operator:
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 of Investor Relations. Please go ahead, sir.
Randy Guiler:
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. [Operator Instructions].
Now, I'd like to turn the call over to Bob Sasser, Dollar Tree's Chief Executive Officer.
Bob Sasser:
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 7 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 have 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 2 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 the 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, 8 straight years of comp growth and everything is still a dollar. Cycling comps are 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're attracting new customers every day. And when the customers are in the store, they're buying more. Both traffic and average ticket increased for the quarter. Dollar Tree continues to be part of the solution for millions of consumers as they strive to balance their household budgets. We serve a very loyal and growing customer base. Our commitment is to continue serving our 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 the fourth quarter, store presentations boldly communicated the 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 merchant at stores continued to build on our Last 10 Days strategy by bringing all of the last minute categories together and remerchandising the front of the store with a purpose. Our goal was to be the 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're buying your wrap and supplies anywhere else, you're paying too much. In addition to our seasonal energy, customers continued 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 Deals stores to Dollar Tree stores for a total of 184 Dollar Tree projects during the fourth quarter. Total Dollar Tree banner 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 the business initiatives include category expansions. Customers are realizing more value as we rationalize and expand assortments in pet supplies, hardware, health care, 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'll 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 in 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 Deals store locations. As we announced in October, we plan to dedicate our full energy and resources to our 2 primary banners, Dollar Tree and Family Dollar. As planned, the rebannering of our 222 Deals 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 U.S. We plan to begin shipping products from this new facility in July. To support continued growth in western markets, we're expanding our Stockton, California distribution center 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 the 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 2 quarters in, the stores are cleaner, the shelves are better stocked, we had cleaned up old inventory and the end caps were 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 price 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 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 onetime costs of $300 million. As a reminder, we have identified synergies in 4 primary areas:
First of all, sourcing and procurement; second, our rebanner program for optimizing store formats; third, distribution and logistics; and fourth, 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's more to come here. We're 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 the right banner in the best location to serve our customers. We're finalizing the supply chain road map, 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 costs through 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, but 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'll turn the call over to Kevin to provide more detail on our fourth quarter financial performance and our initial outlook for 2016.
Kevin Wampler:
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 Deals 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 1/2 of the 70 basis point declined as a percent of sales was related to actual accrued markdowns associated with the planned conversion of all Deals 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 costs. 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 was driven by improved mark-on and lower markdowns partially offset by higher occupancy costs. 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 corporate expenses, including legal fees and costs associated with the Deals 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 $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 costs 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 points 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 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 credits 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 Deals stores, for a total of more than 1,000 store projects in 2016. In addition, we'll add frozen and refrigerated capability to approximately 400 Dollar Tree stores. We 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 2 items, which are included in our guidance. First, it includes $8 million for Q1 and $5 million for Q2 depreciation above the historical run rate for Family Dollar as a result of harmonizing the depreciable lives accounting policies of the 2 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 begin 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 Deals 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 a 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.
Bob Sasser:
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 am 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 3. I believe we can exceed these expectations. These synergies will be achieved through a combination of lower end costs from 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're a larger, stronger and more diversified business, better able to grow in more markets, while serving more customers with exactly what they're looking for, great value in every store, every day. Our future has never been brighter. Operator, we're now ready for questions.
Operator:
[Operator Instructions] We'll take our first question from Michael Lasser with UBS.
Michael Lasser:
On the core Dollar Tree business, this is third the quarter in 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.
Bob Sasser:
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're -- more merchandise and more assortment than we've ever had. So there's no limitation to that. If you look at the 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 continues 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 costs 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. You had a follow-up question?
Michael Lasser:
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 costs to harvest the synergies within your outlook for the upcoming year?
Kevin Wampler:
Michael, as we worked to put our guidance together for the full year, we were obviously taking all of those things into consideration. Obviously, from a wage perspective, there are, continue to be certain states in the U.S. 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 costs achieved, 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.
Operator:
And our next question comes from Scot Ciccarelli with RBC capital.
Scot Ciccarelli:
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, and I think you guys talked about it last quarter as well.
Kevin Wampler:
Yes, 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 0.5%, 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've 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.
Scot Ciccarelli:
Okay, that's helpful. And 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 that the timing issues that you already mentioned?
Kevin Wampler:
Yes, I mean, as we think about, there's -- 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.
Scot Ciccarelli:
And was there anything that you were able to capture in the fourth quarter that you can outline?
Kevin Wampler:
Yes, 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. But 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.
Scot Ciccarelli:
In other words, just for final clarification here, the bulk of the synergies for first year we're really going to start to see accelerate in 2Q of '16?
Kevin Wampler:
I think that's when we'll start to definitely see some things hitting that will make a difference.
Operator:
Our next question comes from Stephen Grambling with Goldman Sachs.
Stephen Grambling:
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.
Kevin Wampler:
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 a mid-7% number. If you look at it for the full year, you're at the high 7s, approaching 8%. We're going to give guidance as a combined company. We'll give you color at the end of each quarter, but that's how we're going to factor that as we go forward.
Stephen Grambling:
Okay, fair enough. And 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?
Bob Sasser:
Yes, I will tell you that rebanners are meeting our expectations. We started off, as you know, with an analysis of the 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're going to -- we'd like to take a look at doing that. We modeled against really the Family Dollar -- 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 will tell you that we 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 up with a sales projection. And from that, we knew what we could do, what we thought we can do as a Dollar Tree. So that's how we chose them. I don't think there's -- it's really early. One of the reasons we're doing 100 this year instead of maybe more is the fact that we 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 at most we've only had a few months. So with a little more time, then I think we will 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. The 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.
Stephen Grambling:
And one last one if I can, and then I'll yield. On the transition service agreement, I think you had talked about with the divested stores, was that in place in the quarter? Is there any way to help us size that?
Kevin Wampler:
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 flip side of that, we do get some reimbursement as per the TSA for some of those services provided. It was -- it's on a go-forward basis. My expectation is that it will be, hopefully, fairly neutral, but it's not totally known based upon all the 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.
Operator:
[Operator Instructions] We'll go next to Dan Wewer with Raymond James.
Daniel Wewer:
Bob, 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. Is it seems like the Family Dollar segment could have achieved a little bit better same-store sales growth.
Bob Sasser:
It's just early, Dan. I think we can achieve better, more consistent same-store sales growth at Family Dollar, but boy, there was a lot of things going on there, including a clearance event that was ending sometime in early November, and then 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 the 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. I mean, 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 from -- 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 the consumer 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, 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'll win by running great stories at Family Dollar.
Daniel Wewer:
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, and of course, back then, your stores were only the prototypes, only half of the size that it is currently. With that in mind, just 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?
Bob Sasser:
I wouldn't agree on the 3% to 4% not being out of reach, or even more. I mean, it's really about how well we serve 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 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 costs, we ought to be able to leverage those for both banners and provide more efficient and better supply of merchandise to our stores. So I mean, 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.
Daniel Wewer:
Do think that you're at a point where maybe you need to reinvest some of that industry-leading margin in the Dollar Tree segment back into the market share initiatives?
Bob Sasser:
We should always take a look at that, and we should always let the market and the customer be our guide on what the value equation needs to be. Everything's a $1. Other retailers will raise or lower their prices. At Dollar Tree, we change the product. We'll either improve the value or take a little more in margins. So we'll continue to do that. I will tell you this, though, there's really room -- there's a lot of room in our operating margin to improve it, and 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's 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 our -- by the use of better staffing models and leveraging engineered standards, we can improve our DC costs. 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 of 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 our -- 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'll will continue to leverage those fixed costs with our comp sales increase. And then another big thing is by leveraging the combined companies, as an 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.
Operator:
And our next question will come from Joseph Feldman with Telsey.
Joseph Feldman:
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 kind of platforming across the 2 businesses?
Bob Sasser:
Joe, well, we've got a plan, we've got a road map 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 3 years, of systems integration. We're doing a lot of work around what -- 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've heard me reference St. George, Utah. We're currently working on combining and integrating the WMS systems. We're taking a Family Dollar bannered DC in Saint George, 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'll begin rolling out and combining some others, DCs as appropriate, to do 2 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 the capacity, by being able to ship both banners out of any building will enable us to use the capacity better. And secondly, to improve the cost structure by rationalizing the DC network, getting the DCs in the right places to serve the right banner. So that's some of the priorities that we have. We're going to keep the merchandising separate. There's some of the back office things to do with merchandising we'll try to leverage, but Family Dollar buyers are going to be buying using Family Dollar systems and Dollar Tree alike, 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 freights 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 a color. There is a road map for the entire network, system by system, and it spans the next 3 years, with the most important things to get -- to glean the most value the earliest at the front end.
Joseph Feldman:
And then -- just as a follow-up, can you help dimensionalize maybe this $300 million in synergies. I know there's the 4 buckets, and I know we've talked about some of the merchandising ones probably coming earlier in the process of the 3 years, but like how should we think about how big each bucket is going forward?
Kevin Wampler:
Yes, as we've talked to them, the 4 buckets, the biggest one by far is the procurement bucket, which includes both merchandise and non-merchandise spend, basically, and that's roughly -- it's over 60%, basically of the overall $300 million. So that's where the -- 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 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 and 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 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.
Operator:
Our next question comes from Matt Nemer with Wells Fargo Securities.
Trisha Dill:
This is actually Trisha Dill in for Matt. 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 x the Deals markdowns. And SCO 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.
Kevin Wampler:
Yes, I think on the Dollar Tree side of the equation, I think obviously, the Deals 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 as to Bob speaking to it, 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 a headwind. What was really positive at the end of the day was the fact that our merchandise costs continued 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 to, again, a lot of work being done to make sure we get the -- some of the best net debt costs 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 costs 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 -- 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, but I think with the flow through was actually pretty good at the end of the day. So I think that's how we think about it.
Trisha Dill:
That's very helpful. And 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 '16 guidance?
Kevin Wampler:
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 rights amortization, it's 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 the 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 gave them to you today in the prepared remarks, and that should help you to be able to do any of the adjustments that you want to within your processes. Our viewpoint is we gave GAAP guidance today. That's where we're going to continue to give GAAP guidance on a go-forward basis. We think that is 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.
Operator:
We'll go next to John Zolidis with Buckingham Research.
John Zolidis:
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?
Gary Philbin:
John, Gary Philbin, good morning. Let me start by maybe just describing -- one of the reasons we did the acquisition was to have 2 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 serve them. I 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-month and delivery 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 I 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. And so that's going to be a piece that trip after trip where our 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 the 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 a Family Dollar and mistake one for the other, we've really missed the mark on that assortment. You're going to see 2 compelling stores and assortments, and quite frankly, even on the real estate side, where they live, which really is a growth curve for both banners as we go forward. So I hope that helps.
Operator:
And we can take our final question from Matthew Boss with JPMorgan.
Matthew Boss:
So as we think to the spring versus the fall of this year, what categories 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?
Bob Sasser:
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're 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 a kickoff around that time of the month, when folks have money in their pocket to spend, and we want to be ready. So all of the things that we've been working on, getting the non-go-forward inventory cleared down 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 this springtime. Obviously, we've got the 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 everyday, which our customer research says they'll 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 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 have always had traffic drivers on our sale items. The 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 as 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. And so it's another arrow in our quiver that allows us to deliver value to our customers on a monthly basis, and surely 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 it. So we think it's an exciting kickoff, and really gives our merchants and really with great support from our vendor community, another way to drive more incremental cases at Family Dollar.
Matthew Boss:
Great, and then just a follow-up, with some of that 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?
Kevin Wampler:
I'll take the debt piece, Matt. 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 debt, it could have a positive effect, but at this point in time, within the guidance, there is no assumption of any additional paydown. So that's kind of where that stands at this point.
Bob Sasser:
As far as current trends, obviously, we've finished one period out of the 3. So it's -- we've still got 2 periods to go in the quarter, but I'm pleased with where we are. There's always -- we usually get a weather report sometime in February when weather was adverse, but we had weather 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 around the port strike. And I think you can see in our inventory, we have the inventory that we should have 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. The early Easters at Dollar Tree aren't usually good, so we've said that's 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.
Operator:
And ladies and gentlemen, this does conclude today's Q&A session. I'd like to return the floor to Randy Guiler for closing comments.
Randy Guiler:
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.
Operator:
And this does conclude today's program. Thanks for your participation. You may now disconnect. Have a great day.
Operator:
Good day, everyone, and welcome to the Dollar Tree, Inc.'s Third Quarter Earnings Conference Call. Today's conference is being recorded. For opening remarks and introductions, I will turn the conference over to Mr. Randy Guiler, Vice President, Investor Relations. Please go ahead, sir.
Randy Guiler:
Thank you, Debbie. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the third quarter of fiscal 2015. Participating on today's call will be 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 constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors included in our most recent press release, most recent current report on Form 8-K, quarterly report on Form 10-Q and annual report on Form 10-K, which are all on file with the SEC. We have no obligation to update our forward-looking statements, and you should not expect us to do so. 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.
Bob Sasser:
Thank you, Randy, and good morning, everyone. This morning, we announced results for the third quarter of fiscal 2015. Total sales increased to $4.95 billion and same-store sales increased 2.1% on a constant currency basis. Adjusted cash EPS increased 30.4% to $1.33 per share versus $1.02 per share in the prior year's third quarter.
Despite what continues to be viewed by many as a challenging retail environment, I'm very pleased with our third quarter performance and especially with our continued progress in integrating our recent acquisition of Family Dollar. There have been no surprises that would change our outlook on the strategic rationale. There's only increased excitement about the opportunities that lie ahead as a larger, stronger and more diversified organization. We're only one full quarter into the integration and both our teams are aligned strategically and collaborating to deliver solid results. Accomplishments in the third quarter include another solid quarter for the Dollar Tree banner. As expected, Dollar Tree delivered a low single-digit positive sales comp, same-store sales on a constant currency basis increased 2.1%, and that was on top of a strong 5.9% increase in the third quarter last year. This was the most difficult quarterly comparison for the year. On a 2-year stacked basis, our same-store sales accelerated from the second quarter to the third quarter just as they had done from the first quarter to the second. Sales growth in Q3 was driven by increases in both traffic and average ticket. We're making meaningful progress on integrating the Family Dollar banner. Only one full quarter in, the stores are cleaner, the shelves are better stocked, we've cleaned up old inventory and the end caps are more compelling and relevant. The feedback we're receiving from store teams and customers has been positive. We've developed and announced plan to rebanner our Deals locations. Our full resources and energy are being focused on our 2 primary banners, Dollar Tree and Family Dollar. And on November 2, we announced the successful completion of our required divestiture of 330 Family Dollar stores. I'm extremely pleased with the consistent growth and strength of the Dollar Tree business. This was the 31st consecutive quarter of positive same-store sales. Third quarter results continued to validate the relevance of the Dollar Tree brand as customers are shopping with us more often, we're attracting new customers every day. And when the customers are in the store, they're buying more. Dollar Tree continues to be part of the solution for millions of consumers as they strive to balance their household budgets. We serve a very loyal and growing customer base. Our commitment is to continue serving our existing customers better while taking every opportunity to gain new customers in every store every day. Our merchants do a great job sourcing product that exceeds customer expectations for what $1 can buy at a cost that fits our margin requirements. And our store teams are focused on providing a clean, full, fun and friendly shopping experience. Our merchandise values are better than ever. Seasonal energy was high beginning in August with back-to-school. In addition to dominant displays of back-to-school basics, the customers responded favorably to brightly colored fashion stationery, teacher supplies, classroom essentials and lunchbox values, all priced at $1. In September, we celebrated Dollar Tree's 29th anniversary with Bonus Buys and WOW! items for our customers. Key categories included cleaning supplies, home office essentials, snacks and a broad assortment of special values from our million-dollar brands. Our stores were filled with well-known national brands and high-value private labels throughout the event. Seasonally, our store teams transitioned efficiently from back-to-school to fall harvest and Halloween. In September, Dollar Tree became Halloween headquarters with major statements in Halloween costumes, makeup, home decor, candy and party supplies. Customers responded enthusiastically and our sell-through was improved over last year. Dollar Tree stores are now set and prepared for Christmas and fourth quarter holiday shopping season. For the third quarter, same-store sales increased as a result of growth in both our basic consumables and discretionary products. The top-performing categories in the quarter included snacks and beverage, candy and food, household supplies and beauty and eyewear. Geographically, Dollar Tree same-store sales growth was strongest in the Midwest, followed by the mid-Atlantic, Southeast and Northeast. All 6 geographic zones produced positive same-store sales for the quarter. Looking forward, the Dollar Tree segment is positioned for increased relevance to our customer's 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 third quarter, we opened a total of 118 new Dollar Tree stores and relocated or expanded 16 stores for a total of 134 projects. Additionally, during the quarter, we rebannered 143 Family Dollar stores to Dollar Tree stores, and we're pleased with the results. We're now targeting a total of 200 conversions in this fiscal year. Total Dollar Tree square footage increased 9.9% compared to the prior year, and we ended the quarter with 5,841 Dollar Tree stores in North America. In addition to new stores, we continue to execute our strategy to improve the productivity of our existing stores. Some of our drive-the-business initiatives include category expansions, customers realizing more value as we rationalize and expand assortments in our pet supplies, hardware, health care, beauty and eyewear, as well as home and household products; seasonal relevance, our storefronts change with the seasons. At Dollar Tree, we want to own the seasons at the $1 price point. Merchandise energy and the thrill of the hunt throughout the store. At Dollar Tree, you always find an unexpected value. And being first-of-the-month ready, we place special emphasis on basic consumables, core items at the beginning of each month when many customers are shopping for basic needs. Additionally, we're continuing the expansion of our frozen and refrigerated category. In the third quarter, we installed freezers and coolers in 135 additional stores for a total of 390 stores year-to-date. We currently offer frozen and refrigerated product in 4,148 stores and growing. We continue to support planned growth with infrastructure and distribution capacity ahead of the need. Construction on our newest DC and Cherokee County, South Carolina is well underway, as 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 U.S. We plan to have the facility operational in Q3 of 2016. Additionally, to support continued growth in our California markets, we're expanding our Stockton distribution center from 525,000 to 820,000 square feet, an increase of 55%. This project is scheduled to be completed by the end of our second quarter in 2016. Again, I'm extremely pleased with our company's accomplishments in the third quarter. Our Dollar Tree segment continues to deliver sector-leading operating margins, our customer base is large and growing, and we're on schedule with our integration of Family Dollar. We have an incredible opportunity ahead of us as a combined organization. I view the strategic rationale as more compelling than ever. In the early days of integration, we found nothing that diminishes our vision and plans for value creation. In fact, I'm even more enthusiastic about the opportunity this merger presents for our customers, our suppliers, our associates and our shareholders. Our primary areas of focus for Family Dollar are on the customer, the shopping experience and the value equation. In the third quarter, we kicked off our red tag clearance event while continuing the review of our merchandise assortments and category flow, refining real estate plans, reviewing and refining marketing plans, and defining the table stakes in our stores. With our red tag clearance events, we identified markdown and cleared out old, slow-moving and nonproductive inventory. In doing so, we reclaimed our end caps to make way for fresh, new and seasonal merchandise, and to refresh our discretionary sections in apparel, home and seasonal. All of these are important categories as we enter the holidays. The red tag event was well executed across stores, customers responded to the additional savings, and we have cleared more than $135 million at retail in aged and non-productive inventory. Merchandise assortments are under review. Our focus is on providing product and value that best meets our customer's needs. We're paying special attention to opening price points, national brand pricing, private label products and roles, while rationalizing SKUs for increased productivity and a focus on basic in stock levels. In real estate, we're analyzing portfolio data to gain a better understanding of customer and demographic targets. This is assisting in the identification of additional stores that will have better Dollar Tree demographics for potential rebanner and identifying metrics for improving new store productivity and our return on investment. We're extremely focused on opportunities to improve the customer experience. The table stakes' requirements are being refined, quantified and rolled out for testing. Table stakes include store standards and conditions, the customer experience, merchandise relevance and customer engagement, to name a few of the key metrics. Many of these metrics are less about investment and more about disciplines and benchmarks. Customers are already seeing cleaner aisles with less clutter. For table stakes initiatives that require investments, we plan to manage with the same disciplined approach that we've 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.
We're making great progress on delivering announced synergies. We have 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. In fact, I'll be disappointed if we don't exceed this number. As a reminder, these synergies will be driven through 4 primary avenues:
Sourcing and procurement, our rebanner program for optimizing store formats, distribution and logistics, and overhead and corporate SG&A. As announced, we expect to spend approximately $300 million in onetime costs to achieve these synergies.
We still have a lot of work ahead of us. But at this stage, we're clearly on track to achieve our year 1 milestone of at least $75 million in run rate synergies. Plans and processes to capture sourcing and procurement synergies are well underway. Our exact match initiative to provide the lowest costs on identical items across both banners is nearly complete with expected results, no surprises. The review of similar match items continues. Positive results are growing. We are achieving payment term parity with savings from harmonizing payment terms, auctions, RFPs and a formal bid process are well underway on expense items. Our savings continued to build toward expectations. During the third quarter, we rebannered an additional 143 Family Dollar Stores to Dollar Tree, bringing our total of converted stores to 147. We are continuing to rebanner stores into November and fourth quarter, and we're now targeting a total of 200 conversions for fiscal 2015. The preliminary results are meeting expectations, and feedback from both store teams and customers has been positive. We're well on our way towards finalizing the supply chain roadmap and initiating the multi-banner supply chain project. With a cross organizational functional team, we're 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 to ship both banners out of all facilities. This is a very large project with significant opportunity for long-term synergies. Our first pilot facilities plan to be operational in third quarter of 2016. We continue to make progress on reducing costs through 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, 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. On October 13, we announced plans to rebanner all 222 Deals locations in 2016. For nearly a decade, our committed team of Deals associates has done a great job of consistently providing customers with terrific values. With the acquisition of Family Dollar, we're confident that we can provide more focus and better serve our Deals customers and markets through our primary banners, Dollar Tree and Family Dollar. We will begin the conversion of Deals in January with plans to complete the rebannering of all Deals stores by the end of July 2016. Only a few months into the integration, we've made great progress. There are some quick and easy wins and some that will take more time and a great deal of work. 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 benefits of business for the long term. It is a process. It will take more than a few months, but the return is worth it. Now I'll turn the call over to Kevin to provide more detail on our financial performance and our outlook for the remainder of 2015.
Kevin Wampler:
Thanks, Bob, and good morning, everyone. As a result of the recent acquisition, year-over-year comparisons for the next several quarters will be very complex. However, we have added tables to the press release, which we believe will be helpful in understanding the ongoing business. Total sales for the third quarter grew 136% to $4.95 billion, which includes our first full quarter of Family Dollar sales.
Dollar Tree segment sales increased 8.4% to $2.27 billion, while Family Dollar segment sales increased 6.1% to $2.67 billion. Same-store sales, on a constant currency basis, increased 2.1% versus a very strong 5.9% in the prior year's third quarter. The increase was driven by both traffic and ticket increases. Adjusted for the impact of Canadian currency fluctuations, same-store sales grew 1.7%. Please note that all of the recently acquired Family Dollar Stores and newly rebannered stores are considered new stores and are not included in our same-store sales calculation. We were pleased with Family Dollar sales during the quarter. We saw low to mid-single-digit positive same-store sales each month during the quarter. September was the strongest month, driven by the timing of our red tag clearance event. Geographically, sales strength was relatively balanced by region.
Gross profit for the combined organization increased by $674.7 million or 93% to $1.4 billion for the third quarter of 2015 compared to last year's quarter. The majority of the dollar increase was driven by Family Dollar's gross profit of $627.8 million. A few factors to note are:
During the quarter, $38.4 million was amortized to cost of goods sold related to the inventory step-up and negatively impacted gross margin results. This amount was higher than originally projected based an inventory sell-through. The total dollar amount to be amortized has not changed.
We currently estimate an additional $11 million will be amortized to cost of goods sold in Q4. During the third quarter, we took an additional $13 million in markdowns related -- markdown-related expense in the Family Dollar banner for our red tag clearance event. We ought to take advantage of the success and traffic of the clearance event to clear additional inventory that was deemed non-go-forward. Gross profit margin for the Dollar Tree segment was 34% during the third quarter compared with 34.6% in the prior year's third quarter. The 60 basis point decline, as a percent of sales, was primarily driven by a decrease in mark-on related to increased third-party product testing, increased freight and higher distribution center labor costs. Gross profit margin for the Family Dollar segment was 23.5% during the third quarter compared with 24.3% in the comparable period -- comparable prior year period. Excluding the $38.4 million of inventory step-up amortization and the $13 million of additional clearance markdowns, gross profit margin was 24 point -- 25.4% for the quarter. The improvement of 110 basis points on a comparable basis was driven by improved mark-on, lower markdowns, improvement in freight and distribution costs, partially offset by higher occupancy costs. Selling, general and administrative expenses in the quarter for the combined organization increased 132.7% to $1.18 billion from $505.6 million in last year's third quarter. The majority of the $670.7 million increase related to $628.9 million of Family Dollar expense. Q3 SG&A expense for the Dollar Tree segment, as a percent of sales, was 24.1%, consistent with the prior year's quarter. The current year includes $20.3 million of acquisition and integration-related costs, while the prior year included $14.3 million of acquisition-related costs. Excluding these costs, adjusted SG&A improved to 23.3% for Q3 compared to 23.5% for the prior year's quarter. This 20 basis point improvement was driven primarily by lower incentive comp and legal fees. SG&A expense for the Family Dollar segment, as a percent of sales, was 23.5% compared to 23% in the prior year's quarter. The current year includes $6.8 million of integration and divestiture cost, $19.8 million of depreciation for harmonization of policies and fair market value adjustments and $19.2 million of favorable lease rate amortization. The prior year's comparable period included $30.6 million of restructuring charges and $9.7 million of acquisition-related costs. Excluding these costs, adjusted SG&A increased 40 basis points as a percent of sales to 21.8% from 21.4% in the prior year. The increase was primarily driven by increased repair and maintenance expense in the quarter. Adjusted operating income, excluding acquisition and integrated related costs for Dollar Tree segment increased $11.1 million to $245.1 million. As a percent of sales, adjusted operating income decreased 40 basis points to 10.8% compared to 11.2% of sales from the prior year's third quarter. Adjusted operating income for the Family Dollar segment increased $23.1 million to $96.1 million. As a percent of sales, adjusted operating income increased 70 basis points to 3.6% compared to 2.9% of sales in the prior year's comparable period. Nonoperating expenses for the third quarter totaled $99 million and were comprised primarily of net interest expense of $98.4 million in the quarter. For the third quarter, the company had net income of $81.9 million or $0.35 per diluted share. Adjusted earnings per share, as detailed in the press release table, was $0.49 per diluted share. On an adjusted cash EPS basis, earnings per share for the quarter increased 30.4% to $1.33 per share compared to $1.02 per share in last year's third quarter. In our earnings release issued this morning, we provided a detailed reconciliation of net income to adjusted EBITDA, adjusted cash earnings and adjusted cash earnings per share. Our effective tax rate for the third quarter was 34.3% compared to 36.5% in the prior year's quarter. The lower rate was primarily attributable to an increase in Work Opportunity Tax Credits, or WOTC, in relation to income for the third quarter and a decrease in state tax expense. Combined cash and cash equivalents at quarter end totaled $1.1 billion compared to $407.6 million at the end of the third quarter of last year. Inventory for the Dollar Tree segment at quarter end was 12.1% greater than at the same time last year, while selling square footage increased 9.9%. Inventory per selling square foot increased 2%. We believe that current inventory levels are perfect to support scheduled new store openings and our sales initiatives for the fourth quarter. For the Family Dollar segment, we are extremely pleased with our clearance event, which eliminated aged and non-productive inventory. And at the end of the quarter, inventory decreased 0.3% compared to the prior year. We are continuing to review merchandise assortments and feel our current inventory levels are appropriate for the fourth quarter. Capital expenditures were $169.5 million in the third quarter of 2015 versus $94.2 million in the third quarter last year. For fiscal 2015, we are planning for capital -- consolidated capital expenditures to range from $505 million to $525 million. Capital expenditures will be focused on new stores and remodels, including additional fee development stores, rebanner of select Family Dollar stores to Dollar Tree stores, the addition of frozen and refrigerated capability to approximately 425 stores, IT system enhancements, the construction of our new Cherokee County, South Carolina distribution center and the expansion of our Stockton, California distribution center. Depreciation and amortization totaled $168.7 million for the third quarter versus $50.9 million in the third quarter last year. For fiscal 2015, we expect consolidated depreciation and amortization to range from $470 million to $490 million. As discussed with Q2, this range includes increases over the traditional run rate of depreciation and amortization expense for Family Dollar for 2 items. First, it includes $46 million of depreciation above the historical run rate for Family Dollar as a result of harmonizing the depreciable lives accounting policies of the 2 companies and the increase in the value of assets based on purchase price allocation. Secondly, it includes $45 million for the amortization of favorable lease rights for the purchase price valuation of Family Dollar leases. Our guidance takes into account our actual performance for the first 3 quarters of 2015 as well as our visibility and forecast for the remainder of the year. Our guidance includes the following assumptions. I'd like to reiterate that our same-store sales calculation excludes recently acquired Family Dollar stores and excludes stores that were rebannered from Family Dollar to Dollar Tree. These stores will be included in our same-store sales calculations when they have been owned by Dollar Tree or opened as a Dollar Tree for 15 months. We will continue to experience some degree of cannibalization to Dollar Tree comps as part of our rebanner efforts. This cannibalization expectation was planned and factored into both our rebanner strategy and analysis and our outlook for same-store sales. On October 13, we announced our 2016 plans to rebanner all of our Deals store locations so that we can place all of our focus on our 2 primary banners, Dollar Tree and Family Dollar. The conversion process will be similar to that we are using to convert Family Dollar stores to Dollar Trees. We expect to have this initiative completed by the end of July 2016. Our guidance includes $12.5 million of markdown reserves, accelerated depreciation and other rebannering expense. This represents our best estimate at this time to complete the rebannering of Deals stores to Dollar Tree stores. On November 2, just after our third quarter ended, we announced the successful completion of our required divestiture of 330 Family Dollar stores. These 330 stores represented approximately $45.5 million in annual operating income. Terms of the sales have not been disclosed and the net effect of the divestiture on Dollar Tree's assets and liabilities has been reflected in the consolidated balance sheet. The divestiture will have 2 effects on our future income. In addition to losing the operating income associated with these 330 stores, we also expect to incur $5 million to $10 million in transaction closing costs and setup costs related to transition services. Over a period expected to be no more than 24 months, we will be providing certain support and transition services, and expect to be reimbursed by the buyer for these direct operating costs in support services. The expected financial effect of the divestitures, which includes the loss of the operating income from the 330 stores, along with the cost of the transition services agreement, is included in our guidance. Our guidance also assumes a tax rate of 37.9% for the fourth quarter. Weighted average diluted share counts are assumed to be 235.8 million shares for Q4 and 223.5 million shares for the full year. For the fourth quarter, we are forecasting total sales to range from $5.32 billion to $5.42 billion. For fiscal 2015, we are now estimating total sales to range from $15.45 billion to $15.55 billion. Both of these estimates are based on a low single-digit same-store sales increase. We have attached to our press release a reconciliation of the forecasted Q4 range of net income to adjusted EBITDA and adjusted cash earnings per share. We are forecasting net income to range from $213.2 million to $242.2 million and adjusted cash earnings per diluted share of $2.32 to $2.51 for the fourth quarter. I'll now turn the call back over to Bob.
Bob Sasser:
Thank you, Kevin. The strategic rationale for the Family Dollar acquisition is more compelling than ever. This is an extremely large and complex transaction involving more than 13,000 retail store locations, 180,000 people and 23 distribution centers, which based on store count is the largest of any previous retail merger. While we are very early in the integration process, I'm pleased with our progress.
We have great confidence in our ability and the opportunity and the ability to achieve at least $300 million in annual run rate synergies by the end of year 3. These synergies will be achieved through a combination of lowering costs in both direct and indirect sourcing, banner optimization, logistics and overhead. 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'll close the prepared remarks by saying that 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 31 consecutive quarters, Dollar Tree had delivered positive same-store sales increases. Through good times and difficult times, and all retail cycles, consumers are looking for value no matter the state of the economy. While our price point remains $1, our operating margin continues to lead the discount sector. With the addition of Family Dollar, we're a larger, stronger and more diversified business, better able to serve more customers and more markets with exactly what they're looking for, great value in every store every day. And we have many years of growth ahead of us. Operator, we're now ready for your questions.
Operator:
[Operator Instructions] We'll go first to Matthew Boss with JPMorgan.
Matthew Boss:
So the first question I just wanted to ask is more around Family Dollar. I guess, first, is the inventory clearance now complete? Secondly, have the positive comps continued into the fourth quarter? And then, Bob, if you could just talk about the categories that you've been able to touch so far and how you'd like us to judge you during the holiday and into early next year.
Bob Sasser:
Well, Matt, thank you for the questions. I will tell you that we had great success for the red tag clearance, and the initial plans on that have been pretty much completed. We had great cleanup on that, as I said in the prepared remarks, $135 million worth of inventory at retail moved out. We still will have some Christmas to come. Obviously, we're going to be better served in getting rid of that during the Christmas season. So that's smaller dollars, but that's still yet to come in the fourth quarter. The second question was -- fourth quarter trend, I will tell you that I'm really jazzed about fourth quarter. We're not going to report fourth quarter for a while. So I can't start talking to you about the sales and specificity. But all in all, we're excited about our plans. At Family Dollar, again, we've opened up all those end caps and all that space for our seasonal merchandise. The seasonal merchandise looks really terrific, and we're excited about our opportunities there. And third question was categories?
Randy Guiler:
Category you've touched.
Gary Philbin:
So Matt, this is Gary. Let me just maybe add a little color. As we stepped into driving the business, step one was to get the red tag clearance event going, and that did a couple of things for us. It got rid of unproductive inventory, but I would say it also got ourselves set up for the holiday the right way, which is very important for us. The category we've used are ongoing, but the priority going to the fourth quarter was just to make sure that our holiday merchandise and a lot of our discretionary categories were in place. So during the fourth quarter, you're not going to see wholesale changes in categories. We are focused purely on getting the holiday merchandise out in front of the customer, and I think we have our best opportunity this year to have a great sell on lots of the seasonal relevant items. The merchandising reviews will be ongoing as we go into fiscal '16, and you'll see those changes as we roll them out. But our focus now through the holiday is just purely let's sell all of the holiday merchandise-related Thanksgiving and Christmas that we can.
Matthew Boss:
Great. And then just one quick follow-up. As we think for next year, there's been a lot of talk out there about vendor negotiations and wages. Bob, I know you're not giving formal guidance until February. But anything larger picture that you've uncovered that surprised you so far as you dug into Family Dollar? And just any help around -- the best way to think about vendor funding and wages, I think, would be really helpful.
Bob Sasser:
Well, I will share with you this, one of our synergies was to work with our vendor partners to align the cost on the exact match items and also, to begin work on the similar match items, and we're really well into that, and I'm really excited about -- we're achieving what we expected in that. As far as working with our vendors going forward, our plan is to work with them to provide the best product to our customers, to sell it. And we want to drive product sales from our vendor partners. The way we go-to-market, we prefer, in many cases, to take those incentives and apply it to the cost of goods in such a way that we can share that value with the customer. We're going to make money by selling product and not by collecting funds. Now having said that, we don't expect them, the funds to go away. We expect to work with our vendor partners to use them in such a way that we can drive more cartons, more cases of their product through our doors. So I'm excited about the transition. I think you can get, as a retailer, and many retailers, I think get too focused on collecting the funds and not focused enough on the customer, not focused enough on driving value for the customer. And we're just -- as exactly as we've done it, Dollar Tree, we're always focused on the customer, getting the best price that we possibly can, that includes getting our share of the funding where possible, but getting the lowest price possible so that we can price the product appropriately and drive more chase sales through the front doors. And our vendor partners have the same goal, by the way. So we're completely aligned on that strategy. And I think that plans are coming together very, very nicely.
Operator:
We'll go next to Stephen Grambling with Goldman Sachs.
Stephen Grambling:
So I guess, changing the focus to the Dollar Tree business, as you look at the gross margin line, I think that Kevin mentioned the increased third-party product testing and increased freight cost. Can you just elaborate on some of the drivers of both? And how we should be thinking about these impacts going forward? And then, I guess, maybe a bigger picture question. Just your longer-term expectations for the Dollar Tree segment margin.
Bob Sasser:
Yes, Steve, that's a fair question. I can tell you that the 2 things that Kevin mentioned, there are things that we do in the normal course of business. We have doubled down on our testing, testing more times, especially on some of the categories that are more subject to compliance issues. And the idea is we don't want to fail. We want to make sure that we're providing the safe product for our customers and we doubled down on our testing. I think that's a onetime, not that we're not going to continue testing, but what you saw there was a little bit of a bubble based on a change in the way we are doing our testing that will smooth out over time. I have great confidence we'll be able to manage that for the long haul. The second thing was the big -- largest impact was our DC productivity was lower in third quarter. And there's a couple of things there. And they're all -- you can point to them, we can identify them, and we can fix them over time, but we are here at peak inventory times at Dollar Tree. We are receiving all the products for -- in the third quarter for our third quarter as well as our fourth quarter sales. It was a peak inventory time. And at the same time, we decided to rebanner a couple of hundred Family Dollar stores to Dollar Tree, and we've scrambled around to buy the product and insert that into the inventory equation, receiving it in the appropriate DCs and maybe signing things a little differently, moving things around, as well as rebannering our Deals stores, which, over time, we're not going to start that until January. But just the planning and getting things positioned for that reduced our overall productivity at a time when our buildings are at absolutely maxed peak capacity. As I mentioned a couple of times, we are building a new distribution center of 1,500,000 square feet. We always build ahead of the need, but just ahead of the need in South Carolina to serve Mid-Atlantic and Southeastern Dollar Tree stores as well as expanding our Stockton distribution center over 50% for next year. So we're opening up more capacity while we're doing a lot of things in addition to what we'd originally planned in our distribution model. The result was we had some distribution productivity lag. At the same time, our outbound transportation, which is something we've talked about before, was also a little higher than it has been in the past. So all in all, things are identifiable opportunity to improve, and we will improve on those. But that was really the main components of the drag on the gross profit number in the third quarter.
Stephen Grambling:
Great. And so I guess, the follow-up there was just on the margin cap going forward for Dollar Tree segment, which it sounds like, from putting that all together, would be, theoretically, you'll see some of that even out and be up. Is that fair?
Bob Sasser:
Yes, I mean, we are -- as I said, we're putting this huge company together through -- into a shared services model. Over time, we're going to be combining both banners under one supply chain with all of our buildings supplying product for all banners with the ability to supply merchandise for all banners. At the same time, we're looking at rationalizing our buildings and also, identifying where the capacity needs are going to be for the future. All of that is going on right now. What that means, though, is over time, we will have lower supply chain costs. We're looking for more productivity out of our buildings. We're looking for reducing stem miles as we're able to service both Family Dollar stores and Dollar Tree stores out of the same building. So there's a lot of opportunity to lower costs going forward and to improve our service to our stores through the combined power of this combined supply chain. Let me add one more thing, I don't think I gave you an answer on the margin for Dollar Tree going forward. Merchandise margin for Dollar Tree going forward, I don't think -- we're always in control of that. It's more about the mix than it is the items because we don't have to have anything. I'll say again, we changed a lot of our product every year. And our buyers go to market with the same goal that is to offer the best value for $1 at a margin that fits our margin requirement. So we're still in control of our merchandise margin at Dollar Tree. We have this 1 quarter where we've got some little noise in there, frankly. But like I said, that's identifiable. That's fixable. We're going to prove that over time. But the merchandise markup at Dollar Tree is still absolutely in our control, and I don't see any pressures to change that. Frankly, our sourcing opportunities are improved with both the size of our pencil now, as well as the economic conditions around the world, especially in China, it's really a buyers market out there now.
Operator:
[Operator Instructions] We'll go next to Dan Binder with Jefferies.
Daniel Binder:
It's Dan Binder. I was just curious if you could give us a little bit of color on your thinking for Family Dollar store growth next year and just remind us what it should look like net for this year, net of the closings and rebrands.
Bob Sasser:
We're looking at that right now, Dan. As always, we announced our store growth at the January after -- of the March call after our fourth quarter, and we're going to do that again. There's plenty of room to grow. I will tell you that on the Dollar Tree side, I've always said for years anyway, I've said 7,000 stores in the U.S., Dollar Tree stores, another 1,000 in Canada, makes it 8,000. The Family Dollar, talking to them, they've said for some time, 12,000 Family Dollar Stores in the U.S. So there's a potential of 20,000 stores there. We've got a little over 8,000 now. So there's 13,000 now. So there's plenty of room to grow. We're putting together our plans for 2016. I would tell you that we are directionally pulling back on the number of stores, Family Dollar stores for next year. We're not ready to announce that number yet because we're still working on budgets and all the things, the CapEx and all that goes with that. And we would plan to continue to grow our Dollar Tree banner next year. But again, I'm not going to give you the numbers until the March call. So that's directionally how we're thinking about it, and we'll share more with you when we've got more firm numbers on that.
Daniel Binder:
And then my follow-up question was with regards to the fourth quarter guidance that you provided. If we think about sort of the breakdown between the Family Dollar operating margin versus the Dollar Tree operating margin, I'm not sure, if you could just maybe comment to the Dollar Tree operating margin, how you think about that for Q4? Is it similar sort of contraction in Q4 as we saw in Q3? Or you think it's closer to flat? Or just directionally, how you think it plays out?
Kevin Wampler:
I think, Dan, as we think about it, obviously, because of the -- what you got to take into consideration is the Deals information we gave today, which is the $12.5 million estimated cost. So that's -- a big piece of that is markdowns, which is going to affect the gross margin. But excluding that, I think we would potentially see maybe a little pressure from freight and DC cost in the quarter, but expect SG&A cost to continue to leverage. Obviously, in the quarter just ended, on basically a 2% comp, we leveraged 20 basis points, which felt like a pretty good performance with everything going on. So I think, in general, I think flattish operating margins for the Tree is a reasonable thought process. I think on the Family Dollar side, I think it's -- as I think about it, it's really around how does the holiday sell-through go. And Gary talked about the holiday merchandise and the focus on that. And that will determine, I think, how that plays out at the end of the day. We're very excited about it and have high expectations, but that will be a big piece of it. I think on Family Dollar, on the SG&A side, in general, my expectation would be to show improvement from where we were in Q3. Q3, we were up 40 basis points year-over-year. I wouldn't expect that would necessarily be up 40 basis points. But if we can get somewhere to -- closer to flat, we'd be in a better position, I think.
Operator:
We'll go next to Michael Lasser with UBS.
Michael Lasser:
On the SG&A for the Family Dollar business, how much of the increase that you saw in the quarter that you're implying for the fourth quarter is a cost of doing business? And how much is more onetime in nature? I think the market is trying to understand what the true underlying operating income production of Family Dollar might be, and then we can layer on what our expectations in synergies and other factors might be over the long term right now is just difficult to comprehend at this point.
Kevin Wampler:
Well, I think, obviously, given the color, that looking for the SG&A to be flat to maybe slightly up. We're obviously operating in real time. There's a lot of moving levers, no surprise there at the end of the day. We're being prescriptive the way we look at things on an overall basis. We've talked about the need to potentially invest in the stores. So you saw repairs and maintenance being up in Q3, not totally surprising. So some of that was normal course, some of that was catch-up. We don't really necessarily break it totally down that way when we're looking at it. So we're running the business in real time. We look to control the cost where we can. We don't just spend money that we don't have to, very prescriptive in the way we do it. I know that doesn't really answer the question, but I don't know that I truly can answer your question in the sense of how much of it is onetime versus ongoing. So I mean, that's really what we try to do in the quarter in a sense of stripping out all the unusual things and getting back to a more baseline analysis of showing it up 40 basis points with the, basically, the main component being repairs and maintenance. So again, it's a work in process as we continue to go forward.
Michael Lasser:
Let me ask you from a different perspective. So we looked back last year on a standalone basis, Family Dollar did about $0.5 billion in operating income. Is there anything that you're seeing in the business now to suggest that structurally the way you're going to run the business is that operating income production will be lower as a result of investments you're going to need to be made or other changes moving forward? And I want to abide by the spirit of the question. So I'm also loosely tied to that, can you talk about the interest expense outlook for the fourth quarter, is that a sustainable run rate?
Kevin Wampler:
Interest rate for the fourth quarter, as in our guidance, is projected at $98.4 million. So if you look at the table, I believe it's the last table in the schedules to the press release. It details out the expected interest expense. So that number is what we would expect without any rate increases on an overall standpoint. As far as operating income, we have said, generally speaking, our belief is that we can, over time, get Family Dollar back to historical operating margins, which I think were, if you look at the last 10-year period, they were basically 7% to 8% for a vast majority of that time frame. There's no belief that we can't do that. I think that's really the way we're focused on it as opposed to a specific number of $500 million or whatever. It's really more about continual improvement. It's the way we think about the Dollar Tree business. We think about the Family Dollar business the same way, continual improvement, how do we continue to make the merchandise more relevant, how do we run the stores better, how do we control our costs and how we bring it to the bottom line at the end of the day. So there's no difference there. But there's nothing structurally or competitive-wise that would preclude us from, over time, getting back to that 7% to 8% range.
Operator:
We'll go next to Scot Ciccarelli with RBC Capital Markets.
Scot Ciccarelli:
First, a clarification and then a question. Kevin, just to be clear, the reconciliation for the quarter that you disclosed, the $0.49, that still includes the roughly $66 million of excess amortization you previously highlighted in your 8-K, is that right? So it's more like a $0.67 EPS number?
Kevin Wampler:
Well, basically, what we did, Scot, is what we've done here is taken our reported income before income taxes and really adjusted for items that we had not previously given the Street. So the Street had been giving detailed information via our second quarter call as well as an 8-K that we subsequently filed in regards to really the 3 biggest items being inventory step-up, amortization, as well as the depreciation for the harmonization of the policies, as well as the favorable lease rate amortization. We'd given you all those information. So we assume that was -- that would be in our number because we've given it to you. What we've done here is basically reconcile the things that you didn't know. So the inventory step-up was actually $38.4 million as opposed to the $26.9 million we had given you. So we've adjusted it for that $11.5 million difference. We took an additional $13 million of markdowns for our red tag clearance sales. We've adjusted for that. And then acquisition fees and integration and investor-related costs, which the Street could not have predicted or we did not give any numbers around. So that's the way we thought about it is really trying to reconcile our numbers based upon information that has not been previously given.
Scot Ciccarelli:
Got you. All right. That's very, very helpful for everybody, I think. I guess, the next question, if you guys have been growing Dollar Tree square footage at 7% for many years. Obviously, you're very comfortable with that 7% growth cadence. But now we're doing the rebanners, we have the pending Deal rebanners coupled with, let's call it, the greenfield store growth. Can you talk about your thoughts on the Dollar Tree store growth cannibalization and kind of how that may play out?
Bob Sasser:
We have looked at the cannibalization. There is some degree of cannibalization this year from the 200 stores that we're rebannering. There will be some cannibalization next year from the additional rebanner stores as well as the rebannering of the Deals stores to Dollar Tree and some of them to Family Dollar. So there will be -- continue to be some cannibalization. There always is when we look at these stores to rebanner as well as when we look at new stores, though, we look at the sales projections for the particular store. We also look at the -- any cannibalization that's going to occur in the market. So we look at surrounding stores, and we define what we think the cannibalization is going to be. We then look at the market returns when we're opening up the new stores. And we're going to continue to do that. We've done it with the rebanner stores from Family Dollar. We're doing it with the Deals stores going to Dollar Tree, and we'll do it with our new stores. So cannibalization is just part of it after you open up the first store, the second store. There's some cannibalization in the market. But I will tell you we've done our homework on it. We're pleased with the results that we're getting also from the ones that we've already rebannered. The Deals stores that we're going to rebanner, we've built that model of real estate model per Dollar Tree. So that's one of the reasons that most of those are turning into Dollar Tree stores because they all serve our interest better and with higher returns as Dollar Tree's -- few are going to Family Dollar. So cannibalization is part of it. We'll talk about it. We'll point it out, but it's really the growth in the market and growth in the business for the company that's most important.
Scot Ciccarelli:
Great. As we are looking in the fourth quarter guidance, Bob, and kind of the outlook for '16, is that something you might be able to define for the Street a little bit better?
Bob Sasser:
Well, we'll include it in our guidance. And I think that's the best way we can share it with you, is that as we give guidance, we've included all the things that we know, including cannibalization and including anything that would come in there.
Operator:
We'll take our final question today from Paul Trussell with Deutsche Bank.
Paul Trussell:
I wanted to ask about pricing. Family Dollar sales obviously were strong in the quarter. And I believe you mentioned about $135 million of excess inventory that you were able to get out of that, which I think is about 500 basis points of add-on sales. How do we think about your pricing strategy going forward within this box? You mentioned looking at some private label inserts, some open price points but in particular on the national branded goods, where I know that there was, at least historically, a bit of a spread there between them and peers.
Bob Sasser:
Well, Paul, I want to say a couple of words, and I'll pass it to Gary because he's living and breathing this every day. But obviously, we intend to be competitively priced on our national brand products, where we intend to offer a selection of private label, name-brand equivalent products that is a value to the customers, lower retails than the national brand, but equivalent quality. We think there's a big opportunity for our customers. I think they'll appreciate the value of being able to buy a name-brand equivalent product that costs 30% less, for example, or 20% less or less than the name-brand. So the combination of name-brand's competitive price, name-brand equivalent products and a nice discount to the name-brand price as well as some special opportunities in all the things that we can do with our size to take advantage of opportunities that exist throughout the year. Gary, would you like to add anything on...
Gary Philbin:
Yes, Paul, let me maybe start with your first comment on the $135 million. Keep in mind that was the retail value before we started the markdowns. So we started with a cadence that was already discounted in stores somewhere between 10%, 15%, 20% off, and then we started our markdown cadence of 50%, 75%, 90%. So when you think about the units that we cleared out, the actual retail sales that we were receiving from that pile of goods was fairly static over that time. I think the good news on the clearance was when folks came in for that event, they tend to buy something else in store at our regular retails. And so I think the energy in just getting our stores cleaned up a bit, getting our end caps reclaimed, organizing a clearance event, which is no small a task to make it look like something, all served us pretty well. Maybe just to tag on to Bob's comments, there's an art and science to pricing. And the science piece is we do want to be grounded against our strategy on competition. You always have an eye on that. But what we're really focused on at Family Dollar is what's most meaningful to our customers? What is it that they need for first of the month? What's the basket set they are looking to buy on a weekly and monthly basis? And so our strategy is one that talks to what's on promotion, what's on shelf? The addition for Family Dollar of a private label program that can be polished up and really enhance opening price point and some of the assortment caps we have is a great one, not to mention the addition of -- we have a great import program, but that can also drive additional value into the store. So we really see all those arrows in our quiver as we get rooted in what do we need to be competitive, but really stay focused on what a Family Dollar customer needs to drive value into her basket on a weekly and monthly basis. So that's our approach we're taking as we go through our category reviews and looking into '16.
Paul Trussell:
And just to follow up, to close, Bob, maybe if you can just touch on the consumer overall. I think that your better-than-expected revenue comes on the heels of some other discounters perhaps beating some expectations. Is your sense that your core customer is a bit more confident now has a little bit more money in their pocket? Or are all your gains more market share driven?
Bob Sasser:
Paul, I think the customer, especially our customer, our middle-income -- low -- middle-income to lower-income customers are still under pressure and they're concerned. They've seen lower gasoline prices, and that's helpful. But at the same time, it's not enough to -- that lower-income customer. It's not just enough to make a change your shopping habits. At the same time, they've seen lower gasoline prices. They've seen higher food prices. They've seen higher rent prices. They've seen higher health care costs. They've seen higher taxes. So there's still a concern. They're still under pressure. The concept at Dollar Tree and at Family Dollar of serving those people is serving us well. At Dollar Tree, we've said that we are right for all times. We have great products that people need every day, consumer products, things you got to buy to live, things that you have to have every day, and the price is only $1, alongside things that may be discretionary that you'd like to have, but everything is $1. So through good times and difficult times, we've tended to do very well, and usually better than the market at Dollar Tree. At Family Dollar, with that low-income customer, the more we focus on what that lower-income customer needs, offering the great value, improving our in-stock, giving a better shopping experience, exceeding their expectations when they go into our stores, the better served we're going to be specially during difficult times because the -- that lower-income customer really needs us at Family Dollar and at Dollar Tree in order to make ends meet throughout the month. So that's your question. I mean, I think they are grateful that gasoline prices are lower, but not much else is in their world. And they've got to come a long way really to get their head back above water for many of them.
In closing, I just like to make one comment sort of in regard to that last question, and I'll close with this. But as a combined organization, both banners, our focus is on growing our earnings power for years to come. There's a lot of things that we're doing right now that are in regard to getting us positioned and for the future. Our decisions are always with our eyes on the horizon, but managing in real time. So what you're going to see from us is our decisions are going to be made for the longer term. And I'm not telling you it's going to take forever to make -- to bring value. I'm just saying our decisions are based on building this large entity, combining 2 great banners for the long term. But we are dedicated to managing the business in real time. And that means every month, every day, every quarter, it means every expense line on the P&L, it means looking at our customer in the eye and trying to deliver the product that they need from us and identifying the position that we hold in the market using our size and our leverage to offer the greatest values for that customer. So we're going to do both. And I think I'd like to tell you that my expectation is we're going to continue to improve quarter-over-quarter. This is the first full quarter that we've had the combined companies. I think we had 1 month in the last earnings release. But it's first full quarter that we've had, and we've shown improvement. And some slight improvement, mind you, but improvement. And I think I would tell you that I expect that to continue quarter-over-quarter. We'll show improvement. We're going to share with you all the information that we know that is pertinent to where we're going with this thing. We're not going to surprise anybody with it, but we're not going to give you information until we can absolutely get our arms around it and share with you how that looks going forward. So thank you for your time. And before I turn it back to Randy, I just want to say thank you for your support, and hope everybody has a great Thanksgiving.
Randy Guiler:
Our next quarterly earnings call is tentatively scheduled for Tuesday, March 1, 2016. Thank you, and have a good day.
Operator:
Ladies and gentlemen, thank you for your participation. This does conclude our conference.
Operator:
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.
Randy Guiler:
Thank you, Rochelle. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the second quarter of fiscal 2015. Participating on today's call will be our CEO, Bob Sasser; our 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 constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors included in our most recent press release, most recent current report on Form 8-K, quarterly report on Form 10-Q and annual report on Form 10-K, which are all on file with the SEC. We have no obligation to update our forward-looking statements, and you should not expect us to do so. Unless otherwise noted, all margin, net income and earnings comparisons presented today exclude the impact of the Family Dollar Stores acquisition and integration-related costs for the second quarter and year-to-date. At the end of our prepared remarks, we will open the call to your questions. [Operator Instructions] Now I will turn the call over to Bob Sasser, Dollar Tree's Chief Executive Officer.
Bob Sasser:
Thanks, Randy. Good morning, everyone. This morning, we announced results for the second quarter of fiscal 2015. With the closing of the Family Dollar transition -- transaction on July 6, this is our first sales and earnings report for the combined companies. This report includes 1 month of Family Dollar sales and operations combined with a full quarter of Dollar Tree performance. All Family Dollar stores are reported as new stores.
In the Dollar Tree segment of our business, same-store sales on a constant currency basis increased 2.7%. This is on top of a 4.5% increase in second quarter of last year. Sales growth was driven by increases in both traffic and average ticket, with traffic increasing the most. Adjusted for the impact of Canadian currency fluctuations, the same-store sales increase was 2.4%. Total sales at Dollar Tree stores for the second quarter grew 8.3% to $2.2 billion. This was at the midpoint of our previously announced guidance of $2.17 billion to $2.23 billion. Adjusted operating income increased by $22.4 million or 10.5% to $234.9 million, and adjusted operating margin for the quarter improved 20 basis points to 10.7% compared to 10.5% from the prior year second quarter. Adjusted net income for the Dollar Tree segment increased 10.1% to $138.9 million, and adjusted earnings per diluted share increased 9.8% to $0.67 compared with second quarter 2014 adjusted earnings of $0.61 per diluted share. This was near the top end of our previously announced guidance of $0.63 to $0.68 per diluted share. I'm extremely pleased with the consistent growth and strength of the Dollar Tree business. This was our 30th consecutive quarter of positive same-store sales. Second quarter results continue to validate the relevance of the Dollar Tree brand. Customers are shopping with us more often. We're attracting new customers every day. And when the customers are in the store, they're buying more. Both traffic and average ticket increased for the quarter. Dollar Tree continues to be part of the solution for millions of consumers as they strive to balance their household budgets. We serve a very loyal and growing customer base. Our commitment is to continue serving our existing customers better while taking every opportunity to gain new customers in every store every day. Our merchants do a great job sourcing product that exceeds customer expectations for what $1 can buy at a cost that fits our margin requirements. And our store teams are focused on providing a clean, full, fun and friendly shopping experience. Our merchandise values are better than ever, and our operating margin continues to lead the discount retail sector.
Seasonal energy was high in May beginning with Mother's Day. In addition to party essentials, our stores were well stocked with cards, gifts, gift bags, balloons and candy for mom. Seasonal sell-through was good, and stores quickly and efficiently transitioned to patriotic themes and celebrations surrounding Memorial Day:
picnics, pools, beaches and Summer Fun. Reflecting the seasonal strength of Mother's Day and Memorial Day, May was the strongest month for comp store sales in the quarter. For the full quarter, same-store sales increased as the result of growth in both basic consumables and discretionary products. Top-performing categories include candy and food, party, snacks and beverage and household supplies.
Geographically, Dollar Tree same-store sales growth was the strongest in the Southwest followed by the Midwest, Southeast, Northeast and West Coast. All 5 geographic zones produced positive same-store sales in the quarter. We continue to invest in our customers by offering unbelievable values on many name brands and Bonus Buys, especially in our food, snack, beverage and household supplies. And not to forget the basics. Throughout the quarter, we continue to highlight our million-dollar brands with signage and special displays of those everyday items that provide terrific value to our customers. 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 second quarter, we opened a total of 130 new stores and relocated or expanded 27 stores for a total of 157 projects. The new stores included 121 U.S. Dollar Tree stores, 3 Dollar Tree Canada stores and 2 Deals stores. Additionally, on August 1, we hosted grand openings at the first 4 of our rebannered Family Dollar to Dollar Tree stores. Total Dollar Tree square footage increased 7.8%. We ended the quarter with 5,583 stores, and we're on track with our plan for fiscal 2015, which includes 400 new stores, 75 relocations and expansions for a total of 475 projects across the U.S. and Canada.
In addition to new stores, we continue to execute our strategy to improve the productivity of our existing stores. Some of our drive-the-business initiatives include:
category expansions, where customers are realizing more value as we rationalize and expand assortments in pet supplies, hardware, health care, beauty and eyewear as well as home and household products; seasonal relevance, our storefronts change with the seasons. At Dollar Tree, we want to own the seasons at the $1 price point. Merchandise energy and the thrill of the hunt throughout the store. At Dollar Tree, you'll always find an unexpected value. And 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.
Additionally, we're continuing the expansion of our frozen and refrigerated category. In the second quarter, we installed freezers and coolers in 159 additional stores for a total of 255 additional stores year-to-date. We currently offer frozen and refrigerated products in 3,875 stores, and we continue to grow. Frozen and refrigerated merchandise is generally lower margin, but it's faster turning, more frequently purchased and the increase in shopping frequency provides Dollar Tree the opportunity to drive incremental sales across all categories, including our higher-margin discretionary product. Most importantly, the product serves the needs of our customer. We continue to support planned growth by building infrastructure and distribution capacity ahead of the need. We recently began construction of Dollar Tree DC #11, a 1.5 million square-foot, automated facility in Cherokee County, South Carolina. This facility will provide capacity and increased efficiency to support continued profitable store growth in the Southeastern and Mid-Atlantic U.S. We plan to have the facility operational in third quarter of 2016. I'm extremely pleased with our company's accomplishments in second quarter. Our Dollar Tree business continues to deliver operating margins that lead the value retail sector. Our customer base is large and growing. Both traffic and average ticket increased in second quarter. We have an experienced and talented merchandising team that continues to do a tremendous job of finding and delivering terrific values to our customers with margins that meet our thresholds. In second quarter, merchandise margin increased over the prior year. We announced and began construction on Dollar Tree DC 11, and we completed the acquisition of Family Dollar, immediately transitioning from integration planning to integration execution of the 2 companies. We have an incredible opportunity ahead of us as a combined organization. I am more enthusiastic than ever about the opportunity this merger presents for our customers, our suppliers, our associates and our shareholders. With the successful completion of the acquisition of Family Dollar on July 6, we are now a much larger and more diverse organization, able to benefit from scale and deliver even greater values. With more than 13,800 stores across North America, supported by a solid and scalable infrastructure, this combination provides the unique opportunity to leverage our multiple banners to better serve a broader range of customers while enhancing our ability to deliver long-term profitable growth for our shareholders.
We have great confidence in our ability to deliver at least $300 million in annual run rate synergies by the end of the third year post-closing. These synergies will be driven through 4 primary avenues:
sourcing and procurement; our rebanner program for optimizing store formats; distribution and logistics; and fourth, overhead and corporate SG&A. As previously stated, we expect to spend approximately $300 million in onetime costs to achieve these synergies.
Our priority areas of focus for Family Dollar will be on, first of all, the customer, we will be evolving the merchandise assortments to increase value and better meet their needs; the customer experience, creating a more exciting, inviting and customer-friendly shopping environment; lowering field management turnover; supporting our store initiatives and developing a more performance-based culture throughout the company and increasing store productivity. We will be modifying assortments to improve sales and inventory productivity in existing stores while improving new store remodel and expansion performance. Our 100-day action plan includes 7 key initiatives. First of all, communicating organizational leadership changes and establishing management cadence and coordination. As planned, effective on day 1, Gary Philbin, my business partner for the past 15 years, took over as President and Chief Operating Officer at Family Dollar, and Mike Witynski was promoted to the role of Chief Operating Officer at Dollar Tree. Immediately, we began standing up workgroups and establishing a weekly and monthly cadence of cross-banner meetings. We began defining coordinated merchandise planning and buying across banners. We are consolidating reporting and financial management tools. We've created a stub-year plan to align the Family Dollar calendar with the Dollar Tree retail calendar by the end of the year. We're developing a combined real estate review and approval process. Our goal is to put the right banner in the right location to best serve the customer and to ensure we're using an appropriate pro forma analysis with appropriate hurdle rates for profitability. We are completing our compensation and organization leveling review, bringing both organizations to a common title hierarchy with a common compensation and benefit plan and a common calendar. Second, we immediately kicked off plans and processes to capture sourcing and procurement synergies. One of our largest synergy opportunities is using our size, scale and efficiency to buy better. We currently spend about $10 billion on items for resale and another $3 billion for products and services we buy for use in the business. Immediately following closing, our merchandising teams met to share detailed cost information to identify and quantify specific opportunities and to develop a strategic action plan to obtain the best cost in both banners. The "cost of goods sold" initiative is focused in 3 primary areas. The first area is aligning exact match products carried by both companies and obtaining the lowest cost for both banners. Second is a review of similar match products. Here, our merchants are aligning specifications and combining purchasing power to reduce cost. Third is payment term parity, which will benefit the combined company with savings from harmonizing payment terms. The plans have been developed. The initiative has launched and we're well on our way to achieving our goals of reducing cost of goods sold. Additionally, our procurement teams are addressing our indirect spend. These are items and services that we buy that are used in the business. The opportunity to use our size and efficiency to reduce cost is significant. These items and services have been grouped into waves to be addressed over time through a blend of negotiations, options, RFPs and formal bid processes. This process has also begun, and we're on track to achieve our first 100-day goals. Third, we have officially kicked of our store rebanner process. We are very excited about the opportunity to rebanner store locations to better serve our customers while improving the overall productivity of these individual stores. Our initial focus will be transforming hundreds of underperforming Family Dollar stores into Dollar Tree stores. Using the Dollar Tree real estate model, we're reviewing underperforming Family Dollar stores to determine if they would perform more profitably as Dollar Tree stores. Upon closing, we immediately began the process to rebanner 4 test stores. The test was to validate that we had all the necessary steps in place to facilitate a smooth conversion. The individual stores close for approximately 2 weeks as we liquidate the Family Dollar merchandise, convert the decor, signing and fixtures, train the store teams and bring in the Dollar Tree inventory. These first 4 test stores reopened on August 1, less than 4 weeks following the completion of the acquisition. While very early in the process, these stores experienced successful grand openings as Dollar Tree stores. We have since rebannered and opened 39 more for a total of 43 stores as of last Friday, August 28, with similar grand opening results. Going forward, we've developed a list of stores to be rebannered each week through the end of October, and assuming continued success, we will reengage these efforts in 2016. By the end of October, we expect to have more than 150 stores converted. We're very pleased with the process and with the early results. Feedback from customers in these markets has been positive. Fourth, in the first 100 days, we plan to establish cross-organizational IT access and finalize our initial technology integration strategy. Both Dollar Tree and Family Dollar have very good technology platforms, and there are no significant gaps or immediate needs. Through our integration planning, we've developed a road map to strategically combine our technology over time. The timing of these changes will be driven by the size of achievable synergies versus the expected cost. Our current plan or road map includes 4 primary phases. Immediately in Phase 1, we're addressing back-office system consolidations. Phase 2 addresses system alignment related to transportation, workforce and HR support and business intelligence. Phase 3 addresses consolidation of core merchandising systems, including forecasting and replenishment. And Phase 4 addresses projects related to distribution center management, point-of-sale and real estate. Fifth, we're developing and initiating plans to better serve the Family Dollar customer and to build sales momentum. Raising the table stakes is a key priority and a significant opportunity in our integration efforts. Our first 100-day plans include clearing aged and nonproductive inventory while improving our in-stock position on everyday basics. This includes reclaiming prime space for impactful displays for our fourth quarter seasonal and promotional assortment and continuing the analysis of productivity by category. Sixth, we will be finalizing the supply chain road map and initiating the multi-banner supply chain project. Working with a cross-banner functional team and third-party supply chain consultants, we're developing plans for integrating our warehouse management systems and making plans to rationalize the fleet of combined DCs, analyzing our space need by banner and determining our ability to ship both banners out of each facility. This is a very large product -- project with a very significant opportunity for long-term synergies. Seventh, we're further developing and initiating plans to reduce costs with a shared services model. Over time, we will be combining our efforts to support both banners with a shared service organization in human resources, finance, information technology, logistics, legal, strategy and audit. Our goal is to provide consistent, efficient support of our business initiatives across the combined organization while reducing costs. This is a high-level overview of some of the components of our 100-day action plan. There are some quick and easy wins here and some that will take a great deal of work. 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 is a process. It will take time, but the size of the prize is worth it. Now I'll turn the call over to Kevin to provide more detail on our financial metrics and our outlook for 2015.
Kevin Wampler:
Thanks, Bob, and good morning. As Bob mentioned, we were pleased with our overall performance for the second quarter. The Dollar Tree segment performed well within the range of guidance that we provided. As a result of the acquisition, year-over-year comparisons for the next 4 quarters will be more complex than normal since there's no prior year data for the Family Dollar segment.
Total sales for the second quarter grew 48.3% to $3.01 billion, which includes 4 weeks of Family Dollar sales. Excluding the $812 million in Family Dollar sales, the Dollar Tree segment sales increased 8.3%. Same-store sales on a constant currency basis increased 2.7% versus a strong 4.5% in the prior year second quarter. The increase was driven by both traffic and ticket. Adjusted for the impact of Canadian currency fluctuations, same-store sales grew 2.4%. Please note that all of the recently acquired Family Dollar stores and newly rebannered stores are considered new stores and are not included in our same-store sales calculation. Gross profit for the combined organization increased by $161.1 million or 23.2% to $855.2 million for the second quarter of 2015 compared to last year's quarter. The majority of the dollar increase was driven by Family Dollar's gross profit of $105.9 million. A few factors to note are, as a result of the purchase price allocation for the acquisition, a preliminary purchase accounting adjustment of $116.3 million was recorded for the step up in basis of Family Dollar inventory to its fair value. Of this amount, $55 million is amortizable, of which $11.1 million was amortized during the second quarter to cost of goods sold and negatively impacted gross margin results. We expect an additional $38.1 million will be amortized to cost of goods sold over the remaining 6 months of 2015. During the second quarter, we also took a $60 million markdown reserve for SKU rationalization and planned liquidations related to Family Dollar inventory that will not be carried going forward. Gross profit margin for the Dollar Tree segment was 34.1% during the second quarter compared with 34.2% in the prior year second quarter. The 10 basis point decline as a percent of sales was driven by higher shrink in occupancy costs, partially offset by improved merchandise costs. Selling, general and administrative expenses in the quarter for the combined organization increased 49.7% to $731.8 million from $489 million in last year's second quarter. The majority of the $242.7 million increase related to $200.9 million of Family Dollar expense, which included $6.5 million for the amortization of favorable lease rights recorded in connection with the acquisition and $6.5 million of additional depreciation for the harmonization of the combined company policies. For the second quarter, we incurred $17.7 million or 55 basis points of expenses related to the Family Dollar acquisition compared to $7.5 million or 35 basis points of acquisition expenses in the second quarter of 2014. As a percent of sales, SG&A expenses increased 20 basis points to 24.3% in the second quarter from 24.1% in the same quarter last year. Excluding acquisition costs, SG&A expense as a percent of sales was consistent with the prior year at 23.7%. Adjusted SG&A expense for the Dollar Tree segment was $514.4 million or 23.4% of sales. As a percent of sales, this represented a 30 basis point improvement compared to the second quarter of 2014 adjusted SG&A expense for the Dollar Tree segment of 23.7%. The decrease was driven by improved store labor productivity, lower incentive comp and lower legal fees as a percent of sales. Operating income for the combined organization decreased to $123.4 million compared with $205 million in the same period last year. This decrease is a result of lower gross profit margin and higher SG&A expenses, as previously mentioned.
Adjusted operating income for the Dollar Tree segment increased $22.4 million to $234.9 million or 10.7% of sales compared to 10.5% of sales in the prior year second quarter. Nonoperating expenses for the second quarter totaled $265.6 million and were comprised of the following:
a $1.7 million expense due to an unfavorable fair market value adjustment on diesel fuel swaps; a net interest expense of $263.9 million in the quarter compared to $8.4 million in the prior year second quarter. This increase included interest on the long-term debt for the acquisition, an $89.5 million breakage fee related to the prepayment of the Dollar Tree senior notes and a $39.5 million prepayment fee related to the Term Loan B refinancing; a $17.4 million write-off of original issue discount; and a $5.9 million write-off of deferred financing cost related to the Term Loan B refinancing. The quarterly run rate for interest expense going forward will be approximately $100 million, including deferred financing cost amortization.
For the second quarter, the company had a net loss of $98 million or $0.46 per diluted share. Excluding acquisition-related adjustments, the company had net income of $53.5 million or $0.25 per diluted share. Adjusted net income for the Dollar Tree segment was $138.9 million or $0.67 per adjusted diluted share, a 9.8% increase when compared to the reported adjusted earnings per share of $0.61 per diluted share in the prior year second quarter. Our effective tax rate for the second quarter was a benefit of 31.1% compared to an expense of 38.2% in the prior year quarter. The decrease was primarily the result of the pretax income loss in the second -- in the quarter and the nondeductible acquisition costs. Looking at the balance sheet and statement of cash flow. Combined cash and cash equivalents at quarter end totaled $1.3 billion compared to $467.7 million at the end of the second quarter of 2014. Inventory for the Dollar Tree segment at quarter-end was 6.7% greater than at the same time last year, while selling square footage increased 7.8%. Consolidated inventory per selling square foot decreased 1%. We believe that current inventory levels are appropriate to support scheduled new store openings and our sales initiatives for the third quarter. Consolidated capital expenditures were $100.1 million in the second quarter of 2015 versus $88.3 million in the second quarter of last year. For the full year 2015, we're planning for consolidated capital expenditures to range from $600 million to $615 million. Capital expenditures will be focused on new stores and remodels, including additional few development stores; rebanner of select Family Dollar stores to Dollar Tree stores; the addition of frozen and refrigerated capability to approximately 425 Dollar Tree stores, up from the previous expectation of 320; IT system enhancements; and the construction of our new Cherokee County, South Carolina distribution center. Depreciation and amortization totaled $89.5 million for the second quarter versus $49.9 million in the second quarter last year. For 2015, we expect consolidated depreciation and amortization to range from $470 million to $490 million. This range includes increases over the traditional run rate of depreciation and amortization expense for Family Dollar for 2 items. First, it includes $46 million of depreciation above the historical run rate for Family Dollar as a result of harmonizing the depreciable lines accounting policies of the 2 companies and the increase in the value of assets based on the purchase price allocation. Secondly, it includes $45 million for the amortization of favorable lease rights for the purchase price valuation of Family Dollar leases. For the third quarter, we are forecasting total sales to range from $4.78 billion to $4.87 billion. For the full year of 2015, we are now estimating total sales will range from $15.3 billion to $15.52 billion. Both of these estimates are based on low single-digit same-store sales increase. Weighted average diluted share counts are assumed to be 235.7 million shares for Q3 and 223.5 million shares for the full year. Our expectations for the Dollar Tree segment of our business in the back half have not materially changed from our original expectation as we entered the year. However, as a result of the recently completed acquisition, the significant integration initiatives and the divestiture process, we are not providing earnings per share guidance for the third quarter or full year at this time. I would like to reiterate that our same-store sales calculation excludes recently acquired Family Dollar stores and excludes stores that are rebannered from Family Dollar to Dollar Tree. We will experience some degree of cannibalization to Dollar Tree comps as part of our rebanner efforts. This cannibalization expectation was planned and factored into both our rebanner strategy analysis and our outlook for same-store sales in the back half of 2015.
I would like to briefly speak to the divestiture process. Related to our acquisition, we reached an agreement to divest 330 Family Dollar stores to Sycamore Partners to satisfy the Federal Trade Commission's divestiture requirements. These 330 stores represent approximately $45.5 million in annual operating income. We're on schedule to close on the divestiture sale later this year. The closing of the divestiture transaction will not change our future net assets because the net effect of the divestiture on Dollar Tree's assets and liabilities are reflected in the consolidated balance sheet in our Form 10-Q being filed today. The divestiture will have 2 effects on our future income:
in addition to losing the operating income associated with these 330 stores, we also expect to incur $5 million to $10 million in transaction closing costs and setup costs related to transition services. Over a period expected to be no more than 24 months, we will be providing certain support and transition services and expect to be reimbursed by the buyer for these direct operating costs and support services.
I will now turn the call back over to Bob.
Bob Sasser:
Thank you, Kevin. It's an exciting time for Dollar Tree. The strategic rationale for the Family Dollar acquisition is more compelling than ever. This is an extremely large and complex transaction involving more than 13,000 retail store locations and 23 distribution centers, the largest of any previous retail merger, and it will take some time. It is early in the integration process, and I'm more enthusiastic than ever about the long-term opportunity to provide substantially increased shareholder value.
We have great confidence in our opportunity and ability to achieve at least $300 million in annual run rate synergies by the end of year 3. These synergies will be achieved through a combination of lowering costs in both direct and indirect sourcing, banner optimization, logistics and overhead. 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 in placing our initial emphasis in these areas, we can materially enhance operating performance of the Family Dollar brand through improvements in sales, margin, expense control and greater customer satisfaction. Before we go to Q&A, I'd like to introduce Gary Philbin to our call. Effective immediately upon closing, Gary took over as President and Chief Operating Officer at Family Dollar. This is a key role that had been vacant for about 18 months, and the organization was in need of direction and leadership following the lengthy acquisition process. Many of you already know Gary. We've worked together, improving and growing the Dollar Tree business for the past 15 years, and I have tremendous confidence in his ability as a retailer and as a leader. Gary?
Gary Philbin:
Thank you, Bob, and good morning, everyone. First, let me say we are only 8 weeks into the integration, and we are enthusiastic about the initial progress and this incredible opportunity ahead of us. I'm pleased with the dedication and focus of the entire Family Dollar team. As you know, Family Dollar's a well-established brand that has been successful for more than 50 years. I think our FD, Family Dollar business, is not broken. We simply need to roll up our sleeves, focus on what's important, and we have work to do to polish up this well-known brand.
Bob provided a high-level strategic overview of our 100-day action plan. I would like to provide greater detail into the execution components and our areas of focus on improving the Family Dollar's customer shopping experience.
Our goal is to consistently provide great value, affordable prices and relevant items in a store environment that is convenient, clean, reliable and productive. To accomplish this goal, we're going to build on 4 basic fundamentals:
great product value, well-run stores, smart choices for our customers and consistency of in-stocks on everyday items. Nothing I said here is new to retail. This is really Retail 101. We are focused on consistent execution, combined with a relentless focus on our customer. It's important to understand that we will be making investments to improve what we refer to table stakes, and these investments will include delivering on the consistency of a clean-store benchmark, catching up on deferred maintenance, investing in the right amount of payroll to drive both productivity and enhance the customer experience and improving the overall efficiency of our in-store processes.
Importantly, we are kicking off a process to clear non-go-forward merchandise in the stores. So you're likely to see clearance activity over the next couple of months as we gear up for having our shelves stocked with basic, everyday items and to show off our great seasonal product. This will have an impact on margins near term, but it's absolutely the right thing to do for our business in the long term. Before I turn the call back over to Bob, I just want to say again, I'm proud to be part of the Family Dollar team. I am pleased with the work being done, and I'm excited about the opportunities this will present, both for our vendor community and our Family Dollar team members as we improve and grow the Family Dollar brand. Now let me turn it back over to Bob.
Bob Sasser:
Thank you, Gary. I want to close the prepared remarks by saying that 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 30 consecutive quarters, Dollar Tree has delivered positive same-store sales increases. Through good times and difficult times in all retail cycles, consumers are looking for value no matter 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're a larger, stronger and more diversified business, better able to serve more customers and more markets with exactly what they're looking for:
great value in every store every day. And we have many years of growth ahead of us. Over the past 3 weeks, I've had the privilege to attend and present at both Family Dollar's Annual Leadership Conference and Dollar Tree's annual field management meeting. I could not be more proud of our combined organizations. Our field management and our leadership teams are talented, experienced, energized and incredibly motivated.
Operator, we are now ready for questions.
Operator:
[Operator Instructions] And our first question, we'll hear from Scot Ciccarelli with RBC Capital Markets.
Scot Ciccarelli:
Scot Ciccarelli. A couple of things, can you help us better understand the moving pieces on the Family Dollar side? It looks like even after adjusting for the charges, Kevin, that you outlined, gross margins were dramatically lower than their historical run rate. So whether it's kind of giving us year-over-year comparable figures or a way to kind of build up a bridge to what might be kind of a run -- go-forward run rate number.
Kevin Wampler:
Yes. I think the big thing we got to keep in mind is there are some geography differences in the way we have historically reported our gross profit and the way that the Family Dollar has. So you got to remember, within our gross margin, we have occupancy and distribution costs up there. So within -- that change has been made to Family Dollar's reporting on a go-forward basis, so that's probably the biggest difference that you would see from a comparability standpoint from where it -- from what it traditionally had been reported as, Scot.
Scot Ciccarelli:
Okay. And then I would like to follow up on that. And then also, as you guys kind of think about Family Dollar, maybe this is for Gary, it's obviously been an underperforming asset for the last couple of years. It sounds like you guys have a lot of kind of go-forward opportunities to fix the business and deep into the plans. But when you think about the profitability opportunity of that entity on a stand-alone basis, do you guys have some sort of kind of medium-term or a long-term profitability target for the Family Dollar segment?
Gary Philbin:
Scot, thank you. I would just say this. We know the synergy piece that we're working on, and this is going to be a bit of a marathon, not a sprint. But the same things that we've talked about over the years at Dollar Tree play pretty nicely into Family Dollar. And I would just go back to some of the basics we're working on. We are walking the assortments in the store 4 feet by 4 feet to get the assortment right. We are taking a look at store operations to understand how do we improve the processes that drive productivity. We're going to take a very hard look at all of our expense lines so that we can fund those things so we can invest in the customer experience. So it's really just connecting the same dots you've heard us preach over the years here at Dollar Tree, and those are going to be the levers we push to drive to the bottom line.
Bob Sasser:
Scot, I would just like to add, too, that the -- you've mentioned the short term versus long term. And I will tell you, this is -- we're going to manage this in the short term, but it's the long-term vision that I'm really excited about. It wasn't that long ago that Family Dollar's margins were in the 8% and higher range, operating margin. And certainly, those are in the -- in our near-term sites over the next few years. In the long term, there are others in the sector that are operating at 11%, 12% operating margin. I don't think the operating margin will be as high as the Dollar Tree operating margin because of the nature of our business, the nature of our consumable versus nonconsumable and discretionary business. But certainly, it can be up there amongst others in the discount value sector.
Scot Ciccarelli:
So Bob, just to clarify. Did you say you would expect or believe you can get the Family Dollar business to kind of an 8% margin over the next few years as you guys integrate it?
Bob Sasser:
I'll just say that it wasn't that many years ago that it was at that. So certainly, one of our first goals is to get it from where it is now up to where it has been in recent years and then pass that. There's no reason why we can't polish this thing up and get it back to its proper place, which would be up there at the top with others of the same type business.
Operator:
And next, we'll move to Stephen Grambling with Goldman Sachs.
Stephen Grambling:
I think previously, you had mentioned a low to mid-single-digit accretion to cash EPS in the first year from the acquisition. So I guess it would now be fiscal '16. Is that still on the table? Or has anything changed in your thought process as you've been able to maybe open the kimono a bit?
Kevin Wampler:
As we look at that on a go-forward basis, we stated that back in July of 2014. Obviously, things took obviously a lot longer to close the deal than would have been expected when we made that. The Family Dollar business deteriorated a little bit over that time frame, but time will tell. We don't think it's not possible. There's a lot of moving pieces. I think the other thing you got to remember is, long term, we're really more worried about what the acquisition does for the long term, so we'll have to see. I don't exactly know today, but we'll be there. There's a lot of moving pieces. Obviously, we spoke to a lot of things today about some of the short-term effects from a purchase accounting standpoint, some of those things. Again, some of those are noncash. Some of those do go through the P&L as a regular charge. So a lot of moving pieces, and that's what makes it as complex as it is as we go forward from a comparison standpoint.
Stephen Grambling:
Okay. And I guess one other clarification just on the Family Dollar business. Is there anything you can talk to in terms of the underlying health and trajectory of that business and how that's factored into the sales plan for the year?
Kevin Wampler:
As we looked at it from a sales perspective, as the Family Dollar team looked at that business, I think it's really consistent with the guidance we gave of a low single-digit comp gain. That's really for the Dollar Tree side because the comps -- the Family Dollar stores are not comped. But I think in the back of our mind, there's no reason why they can't in a sense focus and perform at a level like that going forward. So I mean, I think that's just kind of general nature. We expect improvement. Obviously, we've got to go through some processes. We talked about the fact that $60 million reserve to clean up the inventory for nongo-forward items. So it'll be a process there. We hope that, that obviously opens up shelf space as we go forward for the seasonal goods as we go into the fourth quarter and other items that we believe are important to the assortment as we go forward. So a lot of work being done, a lot of moving pieces.
Stephen Grambling:
Good luck in the back half, looking forward to seeing that 8% margin.
Kevin Wampler:
Not in the back half.
Operator:
And we'll move on to Matt Nemer with Wells Fargo.
Matt Nemer:
Given your comments about the product value that you're looking to install in the FDO stores, I'm wondering if you think that the FDO merchandise margins need to be structurally lower than they have been in the past.
Bob Sasser:
I'll say that I don't know that it's -- that it need to be structurally lower. I think it's all about the assortment to some degree, serving that value customer. A lot of things go into that. First of all, being competitive on name brands, same -- for same items between our company and others. We need to do that, as always. That's just sort of one of the table stakes. And past there, it's about the mix. It's how do you create value, especially for that low-income customer. There's a big opportunity with private label. There's a big opportunity for control label. There's a big opportunity for product development to create even more value for that low-end customer. So as we speak of serving a low-end customer and bringing value to that customer, there's more than one way to do it, and it's not all about price on name brand products. It's, in many ways, about understanding that customer, giving them what they need. Sometimes, it's a lower retail item. That doesn't speak to the margin, though. It speaks to the opening price point for that customer. So no, I won't tell you that I expect Family Dollar margins to be lower because we're serving the value customer. I think it's all about the way we bring value to that customer.
Matt Nemer:
Okay, that's helpful. And then just a quick follow-up. Could you talk to the stability of the FDO store managers and the field teams now that you're kind of into the integration process?
Gary Philbin:
We actually had a chance. Timing is everything, but we had a chance to, with Bob and myself, get in front of the entire district manager leadership team at the beginning of August. So we had a great opportunity of laying out the elements that are important to us and what we need a short-term focus on as we head into the holidays. So it was really a great opportunity to talk about what we need to do. And of course store manager turnover is on our radar and something that we need to improve at Family Dollar. And so those issues and elements were laid out in front of the entire group. I would tell you that they're encouraged, they're positive, they're enthusiastic to move forward. And I think that's going to carry over to the stores. And clearly, some of the things that we're going to invest in over time in the facilities and address issues that make us more productive are the types of things that benefit store managers. So I'm encouraged. I think our folks have taken the opportunity and are going to carry it forward for us, and I would expect to see improvement on store manager turnover, which does a lot of good things for us over the long term.
Operator:
And next, we'll move on to Michael Lasser with UBS.
Michael Lasser:
So aside from some of the inventory dynamics that you mentioned, what else is going to impact your outlook from a profitability perspective in the second half of the year? Because I think it is complex and the fact that it is being less so open-ended may offer the impression that there's too many moving pieces for even the company to project. So how can the investment community be expected to forecast profitability?
Kevin Wampler:
Well, I think, in Gary's prepared remarks, he touched on some of the items, as you think about the moving pieces, that are still under consideration when you think about the fact that we've only truly been under the hood for 8 weeks. But Gary talked about investments in a cleaner store and the benchmarks appropriately, cleaning up deferred maintenance and making sure the stores are taken care of appropriately and determining what the right level of payroll is in this model to drive productivity and create a more profitable store at the end of the day. So there's still a lot of moving pieces just from the integration side. And then you have -- as well, as I said, you have timing on the divestiture process side as well. At some point in time, these 330 stores will be -- that are currently included in our base will go away. And then we also have costs around that to help support that, as we said. And so the timing of those costs are not as able to be tied down maybe as tight at this moment as we'd like. So there is a lot of moving pieces. I think we know what they are, but it does create a little more uncertainty in creating a number. I mean, we've taken great pride in being able to provide credible guidance, and that's important to us. And we want to make sure that we have the best information to make this -- to be able to make that and give that you at the end of the day.
Michael Lasser:
So my follow-up is going to be a 2-part follow-up. Based on those comments, it sounds like the prior guidance for core Dollar Tree remains relatively intact on a profitability side. And the guidance -- or your commentary on the guidance also suggests that core Dollar Tree is probably going to do a 1% to 1.5% comp in the second half of the year to get to a low single-digit comp for the year. And it also sounds like that's what it did in June and July based on what you're indicating that May had done. So my question is, a, core profitability for Dollar Tree impact; and b, why might you be expecting a 1% to 1.5% comp for core Dollar Tree moving forward. And is that what we should expect longer term?
Kevin Wampler:
So look, you are correct on the core Dollar Tree profitability. As I said in my prepared remarks, our viewpoint on really the guidance we gave for Dollar Tree, the most updated guidance would have been at the end of Q1, really, hasn't materially changed from that point in time. Our view on the world has not really changed. As it relates to your question on comp, obviously, we don't give a specific range by number value, but low single digit is a wider range than 1.5%. So I don't know that we would expect a 1.5% at the end of the day. So I think that would be how I would answer that question.
Operator:
And next, we'll move on to Dan Wewer with Raymond James.
Daniel Wewer:
Bob, I know that there's a lot of science involved in determining locations for Dollar Tree stores. When you look at the Family Dollar stores that have been selected for conversions, how would you characterize the quality of their locations by Dollar Tree standards? And do you think their stores have the potential to generate the same sales per square foot and operating margin rate than an average Dollar Tree store achieves? Or would you expect these converted stores to be somewhat below Dollar Tree profit standards?
Bob Sasser:
Dan, I would tell you that, first, the Family Dollar site locations, I think that they've got good site locations. Some of them, they're a little off the mark, and they're underperforming for that reason. As you know that over the past few years, I think they opened up a few more in suburban locations than may be normal. I don't know that -- what normal was. But it seemed like, and what I've been told, is that they were aiming more at suburban locations. We see more suburban locations. And as we run those lower-performing stores, we're finding some of those rural and suburban locations that are underperforming that when we run through our model, they turn out to be good Dollar Tree stores. And good Dollar Tree stores meet our Dollar Tree criteria for opening a new Dollar Tree store. These are not -- these are sites that we would open as a Dollar Tree new store and we've been looking at those locations. So what we're taking is the lower-performing stores. They're either lower performing because they're maybe a little off the Family Dollar mark. They're lower performing because maybe the model, the pro formas, weren't exactly aligned. And by the way, with our Dollar Tree margin, we can make a lot of money in a location. Our margins are much higher than the Family Dollar margins. Our mix of product is much different than the Family Dollar product. So a long answer to your question, but these are -- we're looking at these being good Dollar Tree stores. We're taking the lowest-performing and the low-performing Family Dollars, converting them into good Dollar Tree stores. Some of them are going to be breakout home runs, amongst the best of our Dollar Tree stores, on a sales per foot. And some of them are likely going to be underperforming the first year. I believe that the breakout home runs will outweigh. We're early in this, but I believe that breakout home runs will outweigh the underperformers and that most of them are going to be right there in the middle hitting whatever we expected from a Dollar Tree store. It's only been a few weeks. We've only had some grand openings so far. But I will tell you, I'm pleased with the grand openings. And I visited the first 4 test stores when we opened them. I visited all 4 of them, and they look like Dollar Tree stores and they look like Dollar Tree locations and they're in Dollar Tree towns. Customers were pleased to see our Dollar Tree open up in the place of the Family Dollar. So I'm expecting it to be at least as good as a Family -- as a Dollar Tree new store.
Daniel Wewer:
Just as a follow-up question. After the acquisition was first announced, seems like 10 years ago, but you talked about the opportunities of better buying leverage from common vendors, but it really wasn't until after the closing on July 6 that you were able to study the Family Dollar purchasing file, if I'm correct. Did it turn out that the buying leverage would be greater than what you have been talking about over the last year? Or did it turn out both companies were very effective in buying and maybe there's not going to be as much upside as anticipated?
Bob Sasser:
Yes. I think it's at least as good in the near term, and I think there may be even more opportunity in the long term. And where I'm coming from, as we -- we sort of knew in the near term, and we got very quickly to that exact match number. That's just a matter of running the finals and seeing which items are exactly the same and what's the -- who's paying the lowest price, right? I mean, somebody's paying -- you're either paying the same or somebody is paying a lower. If you're paying lower then we believe that both of us deserve that lower cost. So that was pretty much as we thought it would be. The big, I think, power going forward, in addition to that, is going to be into the like items. Not exactly the same items, but they're close. It may be a private label item that we compare to, and specs are a little different. So by aligning the specs and putting that out for bid, if it's a basic item, we think -- we know we can drive some more value by combining our buying power of these 2 large businesses on those, and through product development, just leveraging our buying power to develop product for our stores, whether it's Dollar Tree or Family Dollar or both. So huge opportunities continuing on the buying side. The near term is the exact match. The near match or the close match, like items, I guess, is taking a little bit longer, but may even be a bigger part of the synergy as we go forward. And then not to forget all the things that we buy that we don't sell. We just buy them in expense items and services and things that we buy to use. That's about $3 billion that we have to work with, and every dollar we save on expenses drops right straight to the bottom line.
Daniel Wewer:
Just a real quick question. Do you intend going forward to continue breaking out the Dollar Tree core business separately as you did in the second quarter?
Kevin Wampler:
We will try to give color. We are -- if you look at the Q, there is segment reporting. Even in the press release, there's segment reporting. So we will report on 2 segments. We'll have the Dollar Tree banner, and we'll have the Family Dollar banner. So we will have segment reporting going forward, so we'll give you a good idea of how things are performing.
Operator:
And next, we'll move on to Paul Trussell with Deutsche Bank.
Paul Trussell:
Bob, you just spoke a bit to buying power and the opportunity there. Can you just clarify for us, on the merchant team, are those merchants still staying separate? And also, how should we think about the category mix within FDO? Or should we expect meaningful changes there? And then lastly, on that same point, as we think about the cadence of the $300 million in synergies, can you help us with what's a prudent assumption for year 1? And what is the main driver of those year 1 synergy?
Bob Sasser:
Yes, Paul. The -- first of all, the buying teams are staying separate. We have a terrific Dollar Tree buying team that understands and is focused on delivering tremendous value to our Dollar Tree customer for $1 price and at margins that we're pleased to have. We have, at Family Dollar, a separate team focused on that lower-income customer, the needs-based customer, more of a consumer product customer. 70%-ish, something like that, is consumer products. So the buying teams are staying separate. We're connecting them over -- at the top through merchandise managers and divisional vice presidents and that area. We're coordinating or buying with vendors. We're coordinating the activities on items and -- comparing buying plans and merging those as we go onto buying trips, as we go to Asia, as we go to market in, wherever it is, New York, going to shows and that kind of thing. So a lot of coordination, but we -- I believe it's very important to keep the focus clearly on the Family Dollar banner. We intend to continue opening up Family Dollar stores as well as Dollar Tree stores. Sometimes, they're pretty close to each other, so I'd like to be able to do that and have a difference in the banners when you walk inside, have a difference in the merchandise assortment. So the merchandise assortment at Family Dollar is evolving. It will be changing, as we discussed -- as I've discussed in the past. The synergies, I think we've said in the past it's 25% of the synergies in the first year. We think we can get up to 75% of them by the end of the second full year and then 100% by the end of 3 full years. So that's something like, what, 75, 150, 75, something like that. 150 additional in the second year. So 75, 225 and 300 if you look at it that way. The early synergies are across the board. There are going to be a lot of sourcing and procurement. There will be some in banner optimization. I've said that we're going to do over 150 banner -- new -- rebannering stores this year. So that's a real number. Overhead, we're working through that in every segment of our business. Some of that's going to be driven by our information technology integration. Some of it requires the integration of the technology, for example, in logistics. The ability to ship both banners out of every building is going to require a lot of technology help. So that will be probably later in the process. Earlier in the process are the things about overhead and improvements in SG&A through better -- more efficient procurement and through buying power.
Paul Trussell:
That's very helpful. And just quickly, going back to Dollar Tree stand-alone, and I think Mike Lasser touched on this earlier. But could you just help us better understand the revision in the same-store sales guidance from the low single-digit to low mid-single-digit to now, I think, just low single-digit guidance for the full year? What's the nature of that revision? And if you can give us some understanding on the cadence of the comp through the second quarter and any early comments on back-to-school.
Bob Sasser:
I can give you a little color on the cadence on the comp side. As I initially said in the prepared remarks that May, driven by a couple of terrific holidays, Mother's Day and Memorial Day, you have that seasonal energy, that holiday excitement. So that drove the highest comps for us. June wasn't far behind. July was running pretty much consistent. We did lose a first of the month to a end-of-July week. So some of that business slipped forward. Anytime the first of the month follows on the weekend, then the checks come out in a different cadence, in this case, versus last year. It all came out -- the first and the third came out last year. This year, only the first checks came out. So there was a little slide in that final week of July. But overall, it was fairly consistent through the quarter. And again, every time there's a great holiday, we have a lot of energy in our Dollar Tree stores and you see more traffic and you see more sales from the holiday. Back-to-school started well. It's not over. One of the things that we're experiencing as well as all of retail, I guess, right now is Labor Day is a week later. Labor Day drives a lot of things in the retail business. It drives seasonal sale at sort of the end of the summer, I guess. The pools close end of the summer for retailers and for customers. And that's when a lot of the school starts. Some schools run year round, I realize, some start at different times. But still, a large percentage of schools start after Labor Day. Well, that's a week later this year. So the sales cadence on our back-to-school looks good, but we still got to -- haven't finished with back-to-school yet. So we'll be finishing that up this weekend. It should be terrific weekend in our Dollar Tree stores. If you have one near, drop in, you'll see a lot of sidewalk sales and summer excitement and all that goes with ending the summer season as well as getting ready to go to back to school.
Operator:
And we'll move on to Meredith Adler with Barclays.
Meredith Adler:
Is there anything -- when you look at Family Dollar, I know you said that the delay in getting the deal approved kind of put a little pressure on Family Dollar and made it a little softer. But is there anything that you've seen that comes as a surprise, specifically, a negative surprise? And I guess I would go back to the question that was just asked. It does seem like your guidance for the second half for Dollar Tree's comp is a little bit softer. Is there anything -- is that right, softer than what it was? And is there anything you would point to that would explain why you feel that's going to be the case?
Kevin Wampler:
So Meredith, as you look at the -- people seem to be a little hung up at the moment on this comp guidance. I would tell you that the total sales related to Dollar Tree for the year have changed an immaterial amount within the guidance compared to where they were a quarter ago. So the one thing we did state in our prepared remarks was the fact that there is some cannibalization from the rebannered stores, and we are, as Bob said, doing over 150. So there is some cannibalization we'll feel from those, and that may make us round down from a mid-single digit to a low single digit. But I mean, on an overall basis, as I said, we have not materially changed the way our view is on the Dollar Tree business for the back half.
Meredith Adler:
Good. That is what I was thinking you were saying, but people didn't seem to be hearing it. Maybe you could just comment on, then, Family Dollar. Is there anything that has surprised you, either positive or negative, since you've really gotten into it?
Gary Philbin:
Meredith, this is Gary. Since I'm on the ground there, I would say, listen, I'm enthusiastic because there's all the opportunities that we thought were there are there. And it's really a matter of getting them in cadence and teeing them up and knocking them down. And I would say, there's nothing on the negative side. We knew going in, how do you enhance the customer experience
Operator:
And we do have time for one more question. Next, we'll hear from Dan Binder with Jefferies.
Daniel Binder:
It's Dan Binder. Just going back to the sales plan for a minute. I was wondering if you could give us a little bit of color on how disruptive it is when you close the stores, have to convert them. It's 4 weeks it sounds like is kind of what you're -- it was recently. Is that what you're planning for the balance of the year on the stores that are remaining? And then with the Family Dollar -- within the Family Dollar business, I realize you're not reporting the comp today for their period. But I was curious, when you think about the go-forward plan, kind of what's that underlying organic growth that we're assuming shorter term?
Bob Sasser:
Dan, the first rebannered stores
Gary Philbin:
Dan, just for the first 4 stores, because we could not start markdowns until we closed the transaction, they were accelerated. And so the stores that we've identified in the future have a -- give us a longer runway to appropriately do the markdown. So the first 4, the only difference was we had to do this in a very short window. The teams were able to accomplish that, and we got to the finish line. You will see a more measured time line on the markdowns in the future.
Bob Sasser:
There's another part of the question, I'm trying to...
Daniel Binder:
The other part of the question was sort of the organic growth for Family Dollar stores as we think about the full year guidance.
Bob Sasser:
We -- I will tell you that they were positive in July. Comped positive in July, but they're new stores. So it's less of a comp story now and more of a productivity story. And obviously, we're going to be going through a lot of changes in the remainder of the year. We're so excited about cleaning up the stores. We're so excited about going through the process of rationalizing the assortment, getting rid of old and aged inventory and then replacing that, the space that's opened up from that, with new seasonal product, new promotional product, new high-value product in the stores and what that will do for the customers. In this all-important fourth quarter, we want our customers to see something different. Gary, would you like to...
Gary Philbin:
Well, the short term is, for us, just to get very clearly in front of cleaning up some of the old, nongo-forward merchandise so that we can have merchandise on end caps and the best seasonal impact as we can going to the important holiday season. From the standpoint of store growth, initially, there was a number out there around 550 on Family Dollar for their fiscal year. Appropriately, that dropped down to about 300. So we have slowed down store growth as we take a look under the hood, take a look at the assortments to drive sales per square foot. I'm sitting in on every real estate meeting to identify, really, what's the strategy, where is it working or do we need to recalibrate. And so we'll take a look on both sides of that ledger, where does Family Dollar work best, and really, more than anything, how do we find the right compelling assortments and our operational initiatives to drive higher sales productivity.
Daniel Binder:
And then just as a follow-up, can you give us a little more color on how many stores you ultimately plan to convert? And as you go through this integration, slower Family Dollar store growth makes sense. I'm just curious as you think about the next 2 years beyond this year. I think you just said 300 for this year. What would that -- what would you anticipate that to look like?
Bob Sasser:
Dan, it's 150 -- more than 150 this year. It's as many as we can get done between now and the end of October. Obviously, we want to stop at that point and pay attention to our fourth quarter business, and then we'll pick up again next year. I have really not quantified the total number because there is still work in progress there. It's hundreds. I've said it's hundreds, and I believe it's hundreds of stores that will have the opportunity. There's -- the analysis is ongoing. As we go through more analysis, we'll get more firm direction. The 150-plus number for this year was a new number for you. But as far as how many for next year, we'll share that as we get a little more certainty on the locations and where those are going to be.
Daniel Binder:
Yes. That was really sort of a 2-part question. I'm sorry if I confused you. I was -- the 300, I was talking about new store openings for Family Dollar. I was just curious what that would look like during the integration period as you consider growth for the Family Dollar format next year and the third year.
Bob Sasser:
Well, obviously, we pull back until we can get our more productive new store model and more productive merchandise assortment in the stores. We don't want to be investing and opening a lot of new stores until we know that we're going to have what the model is and it has great success. So in the near term, we pull back. As Gary described, we'll pull back to -- when I say pull back, from peak numbers that Family Dollar has done. Next year will be a pull-back year also. Past that, I think we've got to say that as we get more confidence in the new model, we'll ramp it back up. It's there to be done. There's plenty of room for the Family Dollar stores. We're excited about what we can do with it. We just need this time for the rest of this year and probably next year in order to get confidence that the new model -- now we'll open up stores, but it won't be the peak numbers that we've seen in the past. But we need a little confidence that the new models are going to hit the pro formas.
Operator:
And that will conclude today's question-and-answer session. At this time, I would like to turn the call back over to Mr. Randy Guiler for any additional or closing remarks.
Randy Guiler:
Thank you, Rochelle, and thank you for joining us for today's call and for your continued interest in Dollar Tree. Our next quarterly earnings conference call is scheduled for November 24. Thank you, and have a good day.
Operator:
And that will conclude today's call. We thank you for your participation.
Operator:
Good day, everyone, and welcome to the Dollar Tree's First Quarter Earnings Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Vice President of Investor Relations, Randy Guiler. Please go ahead, sir.
Randy Guiler:
Thank you, Amy. Good morning, and welcome to our call to discuss Dollar Tree's performance for the first quarter of fiscal 2015. Our call will be led by CEO, Bob Sasser, who will share insights on our business performance and initiatives; Kevin Wampler, our CFO, will provide a more detailed review of the first quarter financial performance and will share our outlook.
I would like to remind everyone that various remarks that we will make about future expectations, plans and prospects for the company constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Results may differ materially from those indicated by these forward-looking statements as a result of various factors. These factors are included in our press release, most recent 8-K, 10-Q and 10-K, which are all on file with the SEC. We have no obligation to update our forward-looking statements, and you should not expect us to do so. Unless otherwise noted, all margin, net income and earnings comparisons presented today do exclude the impact of the Family Dollar acquisition-related costs for the first quarter. Acquisition-related costs are included in the adjustments column of the consolidated income statement in today's earnings release. Following our prepared remarks, we will open the call to your questions. [Operator Instructions] I will now turn the call over to Bob Sasser, Dollar Tree's Chief Executive Officer.
Bob Sasser:
Thank you, Randy, and good morning, everyone. This morning, we announced results for the first quarter of fiscal 2015. Same-store sales on a constant currency basis increased 3.4% in the quarter, driven by both increased traffic and increased average ticket. Adjusted for the impact of Canadian currency fluctuations, the same-store sales increase was 3.1%. Total sales grew 8.8% to $2.18 billion. Operating income increased by $11.3 million or 4.9%, and operating margin for the quarter was 11.2% compared to 11.6% from the prior year's first quarter. Net income increased 5.8% to $146.3 million, and adjusted earnings per diluted share increased 6% to $0.71 compared with first quarter 2014 earnings of $0.67 per diluted share.
First quarter results continue to validate the relevance of Dollar Tree. Customers are shopping with us more often. We're attracting new customers every day. And when the customers are in the store, they're buying more. Comp sales for the quarter grew as a result of increases in both traffic and average ticket. This was a unique quarter with several external factors impacting Dollar Tree and other retailers. In particular, a calendar shift with Easter falling 2 weeks earlier this year, we estimate the impact of the holiday calendar shift was a negative $8 million to sales. And additionally, the recent West Coast port slowdown increased in severity. It lasted longer than expected, and it negatively impacted our earnings as higher-margin import merchandise was delayed in getting to the stores. This resulted in lost high-margin sales in the first quarter, incremental transportation and delivery cost per shipments that had to be diverted to alternate facilities and increased labor costs as stores managed uncertain product flow and delivery schedules. The good news is that we are reasonably caught up in the DCs, the merchandise flow of our imports coming through the West Coast is more normalized, product is shipping to the stores more efficiently and our customers are seeing fresh, new, high-value merchandise in the stores. I am particularly proud of our merchandise, logistics and store teams who worked hard to execute the plan during this time frame. Despite these challenges, both sales and earnings were at the midpoint of our range of guidance for the quarter. Dollar Tree continues to be part of the solution for millions of consumers as they strive to balance their household budgets. We serve a very loyal and growing customer base. Our commitment is to continue serving our existing customers better, while taking every opportunity to gain new customers in every store every day. Our merchants do a great job sourcing product that exceeds customer expectations for what $1 can buy at a cost that fits our margin requirements, and our store teams focus on providing a clean, fun and friendly shopping experience. Customers know that when they pull into the parking lot at Dollar Tree, everything's going to be priced at just $1 per item. Our merchandise values are better than ever and our operating margin continues to lead the discount retail sector. First quarter same-store sales on a constant currency basis were solid at 3.4%. Both traffic and average ticket increased, and as expected, March was our strongest comp month reflecting the Easter calendar shift. Adjusting for the holiday shift, same-store sales were relatively balanced by month throughout the quarter. Sales performance across the home, seasonal and basics divisions were tightly grouped and our sales increase resulted from strength in both basic consumables and discretionary products, with discretionary products leading the way. Top-performing categories included party supplies, food and household products. Geographically, with the exception of our Western zone, comp sales performance across the country was relatively consistent in the first quarter. Delayed receipts related to port congestion primarily impacted our Western stores. Despite these challenges, our Western zone still produced slightly positive same-store sales in the first quarter. Seasonal energy was high throughout the quarter, beginning with Valentine's Day. In addition to party essentials, our stores were well-stocked with cards, gifts, gift bags, balloons and candy for that special purpose or that special person. Seasonal sell-through was good and stores quickly and efficiently transitioned to St. Patrick's Day and Easter. While the seasonal display shout red in February, they quickly turned to green in early March with hats, necklaces, socks and party supplies for St. Patrick's Day. And for Easter, our customers found jellybeans, Easter bunnies, chocolate candy baskets and basket stuffers, everything necessary to build colorful, cost-effective Easter baskets for the kids. And for the party planners, our high-value assortment of entertaining needs, including baking products, plates, bowls, cups and napkins, was well-received. We continue to invest in our customers by offering high-value product. In addition to the seasonal energy in first quarter, our President's Day event emphasized unbelievable values on many name brand bonus buys, especially in our food, snack, beverage and household supplies. We offered tremendous values and all priced at just $1 per item. And not to forget the basics. Throughout the quarter, we highlighted our million dollar brands with signing and special displays of these everyday items that provide great values to our customers, especially to meet their spring cleaning and spring decorating needs. We ended the quarter with our inventory clean, well-balanced and stores prepared for Mother's Day and Summer Fun. As we entered May in our fiscal second quarter, we've been pleased with early sales and traffic trends. Looking forward, we are positioned for increased relevance to our customers' sustained growth and improved profitability. We have multiple opportunities to continue growing and improving our businesses through opening more stores, increasing the productivity of all of our stores and further developing our new formats, new markets and new channels of growth vehicles. In the first quarter, we opened 93 new stores and we relocated and expanded 10 existing stores for a total of 103 projects. Total square footage increased 7.1%. We ended the quarter with 5,454 stores, and we're on track with our plan for fiscal 2015, which includes 400 new stores and 75 relocations and expansion for a total of 475 projects across the U.S. and Canada. As a reminder, square footage growth for the full year is planned to increase 7.2% over fiscal 2014. In addition to new stores, we continue to execute our strategy to improve productivity of our existing stores. Some of our drive-the-business initiatives include, first of all, our category expansions where customers are realizing more value as we rationalize and expand assortment, pet supplies, hardware, health care, beauty and eyewear, as well as home and household products. Seasonal relevance is always important at Dollar Tree. Our storefronts change with the seasons. At Dollar Tree, we want to own the seasons at the $1 price point. Merchandise energy and the thrill of the hunt is throughout the store. At Dollar Tree, you always find an unexpected value and being first-of-the-month ready is important. We place special emphasis on basic consumable core items at the beginning of each month when many customers are shopping for basic needs. Additionally, we're continuing the expansion of our frozen and refrigerated category. In the first quarter, we installed freezers and coolers in 96 additional stores. We currently offer frozen and refrigerated product in 3,716 stores and we're growing. Frozen and refrigerated merchandise is generally lower margin, but it is fast returning, more frequently purchased, and the increase in shopping frequency provides Dollar Tree the opportunity to drive incremental sales across all categories, including the higher-margin discretionary product. Most importantly, the product serves the needs of our customer. In addition to Dollar Tree stores in the U.S., Dollar Tree Canada and Deal$ are key brands in our portfolio and key components of our growth strategy. In the first quarter, we grew our store count in Canada by opening 10 new stores, bringing our Dollar Tree Canada store base to 218 stores. We're building the merchant and store teams in Canada to better serve the Canadian customer. We're leveraging the buying power of Dollar Tree. Our merchants are sourcing higher-value product, and our Canadian customers are finding broader, more exciting assortments and better values in the stores. We continue to be pleased with the progress we're making in Canada, and we followed our strong Q4 performance with another solid quarter in Q1, growing comp sales through increases in both average ticket and transaction count. We have significant growth potential in Canada. We're confident the Canadian market will support up to 1,000 Dollar Tree stores and this is in addition to the 7,000 store potential for Dollar Tree in the United States. We want to be recognized by customers as the leading retailer in Canada at the single price point of CAD 1.25, just as we are in the U.S. at the USD 1 price point. Our Deal$ format further extends our ability to serve more customers. By lifting the restriction of the $1 price point, it is providing the opportunity to serve more customers with more categories. Our Deal$ stores provide great values on everyday essentials, party goods, seasonal and home product. The stores operate using a multi-price point strategy and have the potential to generate greater revenues with a higher average ticket. We concluded the first quarter with a total of 221 Deal$ stores. In addition to Dollar Tree, Dollar Tree Canada and Deal$, we're pleased with the growth and performance of our online business. Dollar Tree Direct provides an opportunity to broaden our customer base, drive incremental sales, expand brand awareness and attract more customers into our stores. For 2015, we have a focused commitment to driving traffic to our website. In addition to creating brand awareness and brand advocacy, we are committed to driving sales to both our e-commerce division and our stores. In the first quarter, we saw more than 12 million visits to our website through desktops, laptops, pads and phones. To help drive traffic to our site, we're employing a tremendous effort to reach out to existing and potential customers using a variety of marketing mechanisms. These include e-mails, social media, search engine marketing, video marketing and our Value Seekers Club. In fact, in Q1, we connected with 2 million customers via Facebook, YouTube, Twitter and Pinterest. These avenues enable us to better understand what our customers like, what they want and how we can serve them better. Additionally, we continue to utilize themes on our site to display our exciting lines of product to support events. Whether the theme is Valentine's Day, St. Patrick Day, Easter, Spring Fling or Summer Fun, we have great selections of products at tremendous values. In April, we launched our graduation event which runs through June. Our stores are well-stocked with the right colors to provide their customers with fantastic values for their graduation party needs. Customers are using our Store Color Finder tool on our website to quickly identify which of their local stores have their school colors. We recently distributed our summer catalog to more than 600,000 existing and potential customers. The catalog is chock-full of amazing offers to provide customers with great summer items all priced at just $1. As technology evolves and markets change, our e-commerce team continues to have success and staying on point with our tech-savvy customers and connecting with them effectively and efficiently. With multiple formats, inventory management is very important. It's something we watch carefully, and our inventory continues to be extremely well-managed and our turns continue to increase. In the past 12 months, we've grown our store base by 7.4%, yet our overall inventory dollars have grown only 4.9%. Our seasonal sell-through in first quarter was strong. Our basic in-stock was maintained. And when the customers were shopping our stores, we're ready to serve them. Thanks to the efforts of our merchant, logistics and store teams, inventory turns increased for the quarter again, and we're all well-prepared to support second quarter 2015 sales plans. As you know, we've always supported our planned growth with infrastructure and distribution capacity ahead of the need. We are now in the final stages of determining the location for a new and an additional DC in the Southeast. We plan to break ground on DC11 this year and have the facility online up and running and operating in Q3 of 2016. We will provide more details on this project as our plans are finalized. Now I'll turn the call over to Kevin to provide more detail on our financial metrics and our outlook for 2015.
Kevin Wampler:
Thank you, Bob. As Bob mentioned, our adjusted first quarter earnings increased 6% to $0.71 per diluted share. Once again, we are pleased with another quarter of strong same-store sales. Our constant currency 3.4% comp sales performance was composed of a 2.1% increase in traffic and a 1.3% increase in average ticket. Geographically, our sales performance was nicely balanced across the zones, with the exception of the Western zone as they experienced the majority of the port disruption impact. However, despite experiencing delayed shipments, our Western zone still produced slightly positive same-store sales.
Starting with gross profit, our gross profit margin was 34.4% during the first quarter compared with 34.8% in the prior year's first quarter. The year-over-year decline was primarily attributable to the following factors:
freight costs as a percentage of sales increased as domestic trucking rates were higher. The increase was partially offset by lower diesel costs. Additionally, we incurred added freight costs by rerouting some imports to alternate ports. Secondly, we incurred an approximate 10 basis point unfavorable impact related to the $2 million noncash charge for the change in the inventory accounting method for our Canadian operations to conform Canada's policy to our U.S. policy. This charge was expected and disclosed in the guidance provided in February for the first quarter. Shrink results for the quarter also negatively impacted our margin results.
Excluding acquisition-related costs, SG&A expenses were 23.2% of sales for the quarter, flat as a percent of sales compared to the first quarter last year. Payroll-related expenses increased 10 basis points for the quarter as store bonuses increased based on the company's sales performance, and insurance costs related to health care claims increased. These were partially offset by reduced store payroll due to improved productivity. Depreciation expense decreased by approximately 10 basis points as a result of leverage from the same-store sales increase. Adjusted operating income increased $11.3 million compared to the first quarter last year, and adjusted operating margin declined 40 basis points compared to last year's company record first quarter operating margin to 11.2%. Nonoperating expenses for the first quarter increased $111.5 million from the prior year quarter, primarily due to an increase in interest expense related to the financing for our pending acquisition of Family Dollar. As projected, our prior -- on our prior earnings call, our tax rate for the quarter was 38.4% versus 38.2% in the first quarter of last year. Looking at the balance sheet and statement of cash flow, cash and cash equivalents at quarter end totaled $870.4 million compared to $387.1 million at the end of the first quarter of 2014. We also have restricted cash of $7.2 billion related to the proceeds from the issuance of the senior notes and Term Loan B for the Family Dollar acquisition. Proceeds are being held in an escrow account until the closing of the acquisition. Our consolidated inventory at quarter end was 4.9% greater than at the same time last year, while selling square footage increased 7.1%. Consolidated inventory per selling square foot decreased 2.1%. Our inventory turn increased in the first quarter, and we expect continued improvement in inventory turns for the full year. We believe the current inventory levels are appropriate to support scheduled new store openings and our sales initiatives for the second quarter.
Capital expenditures were $66.9 million in the first quarter of 2015 versus $71.9 million in the first quarter of last year. For the full year 2015, we are planning for consolidated capital expenditures to range from $465 million to $475 million. Capital expenditures will be focused on new stores and remodels, including additional fee development stores, the addition of frozen and refrigerated capability to approximately 320 stores, IT system enhancement and the construction of our new Southwest distribution center. Depreciation and amortization totaled $52.8 million for the first quarter versus $50.7 million in the first quarter of last year. For 2015, we expect depreciation and amortization to range from $215 million to $225 million. Our guidance for 2015 takes into account the actual performance in the first quarter, and except for small refinements to the share count and the tax rate, is unchanged from that which we issued on February 26. It includes the following assumptions:
first, we completed our May 1 ocean freight negotiations with no material change from our prior assumptions. As always, we cannot predict the direction of diesel prices for the next year. For this reason, our guidance assumes that diesel prices will remain similar to the current levels on average throughout fiscal 2015. We also cannot predict future currency fluctuations, so we have not adjusted our guidance for changes in currency rates. Our guidance also assumes a tax rate of 38.3% for the second quarter and 38.1% for the full year. Weighted average diluted share counts are assumed to be 207.1 million shares for the second quarter and for the full year.
Sales and earnings per share outlook then for the second quarter are as follows:
for the second quarter of 2015, we are forecasting sales to range from $2.17 billion to $2.23 billion and diluted earnings per share, excluding acquisition-related costs in the range of $0.63 to $0.68, which would represent a 3% to 11% increase compared to the second quarter of 2014 earnings, excluding acquisition-related costs of $0.61 per diluted share. The sales range implies a low to low mid-single digit comparable store sales increase and 8% square footage growth. Additionally, we have not included any acquisition-related costs in our second quarter outlook as we cannot currently forecast the timing of when these costs will be incurred.
Our outlook for the remaining 3 quarters remains unchanged. For the full fiscal year of 2015 we are now forecasting sales in the range of $9.24 billion and $9.42 billion based on a low to low mid-single digit increase in same-store sales and 7.3% square footage growth. Diluted earnings per share, excluding acquisition-related costs, are now expected to range from $3.32 to $3.47. This represents an increase of 6% to 11% over 2014 earnings per diluted share, excluding acquisition-related costs of $3.12. And I'll now turn the call back over to Bob.
Bob Sasser:
Thanks, Kevin. Before going to Q&A, I know that you all want to hear the latest news on our acquisition of Family Dollar. I hope you have seen the press release. In addition, I will tell you that the strategic rationale for the deal is more compelling than ever. We know much more now than we did 12 months ago and are even more enthusiastic about the long-term transformative nature of this transaction for Dollar Tree. I know you are aware this is an extremely large and complex transaction involving more than 13,000 retail store locations. It is the largest of any previous retail merger. Needless to say, this process has taken longer than any of us anticipated. We're continuing to work very hard to close the transaction as soon as possible, and our current expectation is that we can have this transaction completed in early July. Throughout this lengthy process, we have continued with our integration planning. Our integration teams have developed detailed strategies, objectives and tasks with assigned milestones for achieving these tasks. We have great confidence in our opportunity and ability to achieve at least $300 million in annual run rate synergies by the end of year 3. These synergies will be achieved through a combination of both direct and indirect sourcing, banner optimization, also called rebannering, logistics and overhead. Our priority areas of focus will be on the customer, evolving the merchandise assortment to increase value and better meet their needs. The customer experience in the stores. We want to create a more exciting, inviting and customer-friendly environment. To do that, we're going to have to lower the field turnover. We're going to have to support store initiatives and develop a more performance-based culture throughout the company. And of course, we want to and are going to -- continuing to work very hard on plans to increase store productivity by modifying assortments to improve sales and inventory productivity in existing stores, while improving new store remodeling expansion performance. We plan to employ a disciplined approach to driving key strategic initiatives to the combined organization through improved communication, analysis, collaboration and incentives. We're confident that placing our initial emphasis in these areas can materially enhance operating performance of the Family Dollar brand through improvements in sales, margins, expense control and greater customer satisfaction.
Both Dollar Tree and Family Dollar are ready to integrate. Our teams are incredibly excited about this opportunity to grow our business for the long term by adding the Family Dollar banner to the Dollar Tree portfolio of brands. As always, we will manage this business with a focus on what is best for our stakeholders, including our customers, our vendor partners, our associates, and importantly, our long-term shareholders. I'm pleased with our position at Dollar Tree in the market as the leader in value retailing at the fixed price of $1, and I'm incredibly excited about Dollar Tree's future. The Dollar Tree business model is powerful, flexible and more relevant than ever, providing extreme value to customers while recording record levels of earnings. Our model has been tested by time and validated by history. For 29 consecutive quarters, Dollar Tree has delivered positive same-store sales increases. Through good times and difficult times in all retail cycles, consumers are looking for value no matter the state of the economy. Our operating margin continues to lead the discount sector. We remain committed to the concept our customers love, and we are positioned for continued profitable growth for many years ahead. We have a talented management team that has a long history of retail success. And importantly, we look forward to welcoming the Family Dollar organization into our company.
With the addition of Family Dollar, we will be a bigger, stronger and more diversified business, better able to serve more customers and more markets with exactly what they're looking for:
great value. It's a great time to be Dollar Tree. Our inventories are clean and fresh. The shelves are full of the right product, and our values have never been better.
Operator, we are now ready for questions.
Operator:
[Operator Instructions] First, we'll go to Stephen Grambling with Goldman Sachs.
Stephen Grambling:
I appreciate all the color on the port, but is there any way to quantify the impact more specifically on comps and margins or even relative to the Easter shift?
Bob Sasser:
The -- it's hard to quantify the exact impact. We've looked at it 7 different ways, and there's always this and that and the other. But the evidence is there that our West Coast stores underperformed. We did -- we scrambled all quarter, really starting last year but got a little more severe in first quarter. We did all the things that we were able to do as far as shipping merchandise earlier to get it into the stores earlier. We used alternate ports. We used different modes of transportation once we got into those ports to get it to the right place, and we just scrambled all quarter. The effect was we actually had our Easter product in and our Valentines product in, but it was all the other things, all the basics that we import, the housewares and all the textiles and all those apparel items for the upcoming summer season and all those things that were slow in getting in. And then, of course, once they hit the coast, as you know, they were just anchored out there, lots of ships anchored with lots of containers. They continued to unload, but it was slower. And all the freight that was coming into those West Coast ports starting backing up, which made it even more complex. We were negatively impacted in multiple ways. First of all, top line sales, especially in the West Coast stores, and it was the higher-margin product that was delayed, it was our imports. So top line sales were impacted, margin was impacted. Freight, we spent more money on transportation and we had more costs as product was rerouted to alternate ports. And then, of course, the disruption in the stores as the store teams had planned to set whatever product or whatever promotion. It was just -- it always came but it was late. And the timing was off, which made our stores really work a lot harder. There was more uncertainty in unloading the product when the product was coming in and getting it on the shelves. So all of that together, it's just really hard to put your finger around it. I will tell you that we finished. We still, with the disruption, we still hit the midpoint of our range of guidance on sales and earnings. If not for the port disruption, it would have been better.
Stephen Grambling:
And so, I guess, as we look forward as a related follow-up, did the port disruptions actually open up some opportunities for some excess product that you could potentially buy and some of these better values and position you better as you look forward? And we'd already seen some of these in the stores, so I guess the question also is, how many more opportunities are there to expand those better value products across the chain?
Bob Sasser:
That's a good point. I mean, we work -- we look at that all the time. We work on it every day. We have part of our organization focused on just that opportunity all the time, taking advantage of product that is maybe a little late or could be for all the reasons the product may be distressed and we could buy it even cheaper and offer greater values to our customers. So that opportunity is there. We intended to continue to take advantage of that. But most importantly, for the most part, this port issue is behind us. And as we entered second quarter, it's early in second quarter, we were able to set our Mother's Day product. We had really, really nice Mother's Day sell-through sale and a nice performance in our stores for our Mother's Day product. We're seeing new product on the shelves. When our customers come in now, they're seeing all the things that we expected them to see, that we wanted them to see, and they're reacting pretty well to it. So we're pleased to be past the -- best news about the port slowdown is we're pretty much past it.
Operator:
And next, we'll hear from Meredith Adler, Barclays.
Sean Kras:
Sean Kras on for Meredith. Just wondering if you guys are seeing any changes in the competitive environment. And some competitors are adding store labor. Wondering if this is something that maybe you're considering for some stores.
Bob Sasser:
Well, 2 questions. First of all, I'll just jump in there, but competition is always there. Retail is extremely competitive, always have been. We compete with a very wide variety of retailers. I really can't tell you that I'm seeing anything extra special. It seems like it's always been competitive to me. Our focus continues, it's always been and will continue to be on our business first and foremost, what can we do better to serve our customers? We shop other retailers. We watch what they're doing. We strive to be proactive and not reactionary to what others are doing. That said, we're not seeing -- I don't see any significant changes in the overall competitive landscape. It's always been very competitive. As to the -- I think you talked about the minimum wage and the hourly rates. We watch the industry trends carefully, and of course, we're compliant with all the state and federal regulations. Those are changing. We're watching that. We're responding appropriately to those. Our goal is to pay a competitive wage by market in order to fill our workforce needs based on the prevailing rates. We've made no plans for a sweeping change to our minimum wage rates. As always, we'll work very hard to be competitive along that rate, while working to offset cost increases in general through increased sales and productivity initiatives.
Sean Kras:
And just to clarify, just it seems like you're not contemplating actually adding more incremental labor to stores, but obviously you have thoughts on actual wages themselves. But just no anticipated changes in actual amount of labor is what you're saying.
Bob Sasser:
Probably not in the way you're thinking. We've always ramped our store labor to the sales. So when you say aren't planning to add any more labor to stores, we're planning to increase sales so that increased sales will continue to manage our labor and our payroll to match those sales -- that sales component. But we have no initiative like we've seen maybe in some other retailers to just ramp up, carte blanche, across the board.
Operator:
Next, we'll hear from Scot Ciccarelli, RBC Capital Markets.
Scot Ciccarelli:
Can you give us an idea of how big your Western division is and maybe the magnitude of performance that, that experience versus maybe the other divisions?
Bob Sasser:
I can give you the first part of the question. If you look at just the West Coast DCs and the stores serviced out of there, it's about 30%. And it changes throughout the season, month-over-month, quarter-over-quarter. But just for the most part, around 30%. If you add in the Texas distribution -- Oklahoma distribution center, it goes up to 38% to 40%, something like that, as a percentage of our product, of imports that are coming through. I think that's what you're -- I believe that's what you were trying to get at.
Scot Ciccarelli:
Yes. Absolutely, Bob. And was the Texas DC also impacted?
Bob Sasser:
Absolutely. A matter of fact, it may have been the most highly impacted because once we got it unloaded, the snarl unloaded and got possession of the goods, the Texas DC product then has to go on rail. And by the way, lots of people were trying to do the same thing and then there was a shortage of railcars and it was the usual debacle that it created when everybody's looking for the same commodity at the same time. So frankly, the Texas DC has been the last one to recover, I guess, from the snarl that we had from the West Coast port strike.
Scot Ciccarelli:
Got you. So in other words, 40% of your sales -- as much as 40% of your sales were kind of impacted by this port strike, as well as the mix of product. That's helpful. And when did inventory flows start to normalize?
Bob Sasser:
It was actually, just to clarify, 40% of -- are imports that come in through the West Coast and Oklahoma. So the imports are maybe 40% of our sales. So 40% of 40% of our merchandise for that period of time was disrupted, slowed down and entangled. When did it mitigate? Just recently, I would say, end of April, 1st of May did we start thinking that it's just mopping up the -- around the edges as far as getting the product into the stores. So really just recently.
Operator:
Next, we'll go to Dan Wewer, Raymond James.
Daniel Wewer:
I just want to change the focus to margin trends. And if you could talk about 2 of their pressure points of, one, the higher freight costs. Is that a longer-term issue with driver wages that will persist for the next couple of years? And then also, surprised that shrinkage rate is higher given that the inventory per square foot is actually reduced year-over-year. I would think that would create fewer opportunities for shrink.
Kevin Wampler:
Yes, Dan. This is Kevin. In regards to the first part of your question, the freight costs, we do expect freight cost to be a headwind as we go through the year. And it's not only the driver piece of it, but it's also the fact that as we went through the economic down cycle, there are many less firms out there today, trucking firms, and so the competition has gotten less in some respects. And I think the trucking industry has taken a different view of understanding the lane. Certain lanes need to be profitable. And so they've relooked at their models to make sure that it made sense and so there's been pressure on an overall basis. So we started seeing that in the second half of last year and a lot of that was driver related, but some of it was again just the firms themselves. And so we, again, we expect to see that throughout the year. And it is built into our guidance. As far as it relates to shrink, it has been a little bit tougher start of the year for shrink than we had anticipated. The loss prevention team and the stores are very focused on it, as always. Anything that we always view, the things that we focus on, we can make changes to and affect. And so that's our focus right now. But -- and I wouldn't disagree with your concept of the fact that less inventory should make it a little easier to protect it. So it's a little bit of a trend that we didn't anticipate, but we're very focused on getting it corrected going forward.
Daniel Wewer:
Okay. And just as a follow-up on the closing of the Family Dollar transaction, I guess, it was the third or fourth instance now where the closing has been delayed. Is it solely finding buyers for the divested stores that meet the FTC approval? Is that the only hangup? Or are there some other topics with the acquisition that's creating the delays?
Bob Sasser:
Dan, look, we're as anxious to get this thing done as you can imagine. It's not what you said. It's more of the -- just a large and complex transaction involving more than 13,000 stores. The largest -- in fact, I believe it's the largest retail merger in the United States ever. So it's large. It's complex. We're making progress. We'll continue to provide updates in a public fashion as we're able to do so. What we gave you this morning is where we are now. We have clarity. It's 330 Family Dollar stores that we will be divesting, representing about $45.5 million of operating income. The company intends to reach an agreement with the divestiture buyer in the coming days and secure the FTC clearance thereafter. And we intend to close the proposed merger in early 2015. I know you'll understand that this is all -- everything around this is subject to confidentiality. We could close. It's possible that we could close in late June, but -- early July, it's what we are saying, is more likely. We'll continue to provide updates in a public fashion as we're able to.
Operator:
Next, we'll hear from Laura Champine, Cantor Fitzgerald.
Laura Champine:
But can you talk about, once this merger does close, where do you think the revenue synergy opportunities would be, if any? Or if I should be asking this differently, what do you think is the potential for cannibalization when Family Dollar and Dollar Tree combine?
Bob Sasser:
Oh, gosh, one of the really exciting things about this combination is that it is complementary. We are side-by-side now as a matter of fact in many places and many cases. We aspire to different customers and we aspire to different real estate, but we're both large companies and there are instances now where we have Family Dollars and others, in most cases, frankly, within a few miles of us. When we open a new store, it is my understanding and what I believe is it doesn't really impact the Family Dollar business. When Family Dollar opens a new store near us, I can tell you it does not materially impact our Dollar Tree business. We exist very well together as far as serving different customer needs, different products and for different reasons. So we're complementary in real estate. We're complementary in customers. We aspire to more the suburban customer, although we have some of all -- we aspire to the suburban customer. The Family Dollar model aspires to that urban lower income customer and a rural customer. So these 2 companies just fit incredibly well together as the opportunity is there to grow both banners, to put the right store in front of the right customer. We have tremendous room for growth at Dollar Tree. We've got over 5,000 stores now. We have for years been saying that we could have 7,000 Dollar Tree stores. It's probably more than that. We just need to remodel it. And on the Family Dollar side, I only know what I've read and what you've read, but they have over 8,000 stores and they've said in their public comments that they could have 12,000. So we believe that, that is still there to be done. We believe that through the combination, we can leverage the size and scale of our buying power. We know that there are synergies and cost of goods sold as we combine these companies. We know there are many back-office synergies and savings that we can have. We know that there's huge opportunity. Combined, we have billions of dollars of spend on indirect product, things that we buy not for resale. So with that size of an opportunity together, we expect that we will get better cost, more efficiencies and improve the overall business of both companies. So it's just a huge opportunity. It's transformational. This is the one opportunity where you put the 2 together, 1 plus 1 does equal 2-point-something. One does not take away from the other, from the customer's point of view.
Laura Champine:
And Bob, if I can have a follow-on, so are there items, strong items that Dollar Tree sells in that everything for $1 world view that you can add to Family Dollar stores that should actually drive better results in sales per square foot for Family Dollar stores?
Bob Sasser:
Well, there's certainly things that we carry in our Dollar Tree stores that could be added. The way we're looking at this though is we're looking at the floor plan first and we're looking at the productivity, both sales and margin productivity by department. So you start at the higher level and you look at where your most productive departments are, then we drill down to the categories and we're doing the same thing. Now we're doing this through a clean room now. So I don't have access, direct access, to all the details of cost of things, but we have, through our clean room we, can get the information. We can get enough feedback to know that what we're thinking is right or directionally right. But it's first about the floor plan. What do you want to show the customer? Where is the opportunity to serve the customer better? By expanding this category, can we improve sales per foot and margin per foot in our Family Dollar Stores? Then the real power of this is the combination of the 2 companies, the buying power of each. So even if we don't sell the same item, we're dealing with the same categories. In Dollar Tree, we have the same departments. We have the same vendor base. We deal with the same vendors. It's just that we buy different items in many cases. So leveraging these common vendor relationships with a larger size and larger scale, we believe can be more productive and more efficient for the vendor base and that should turn into better prices for the combined Family Dollar, Dollar Tree. We already know we've been doing a lot of work. We already know there are huge synergies in exact items on both sale sell that we can get lower costs on. One of us has a lower cost than the other now, so we know what that is. And then there's the similar items where it's not exactly the same item, but it's a similar item. It may be 4-packet Dollar Tree, it might be an 8-packet Family Dollar, but it's the same item with a different put-up and the same vendor. The idea of going out to bid or working with those vendors to get the best price for the total company is a powerful synergy that we have and one that we intend to begin leveraging on day 1.
Operator:
Moving on to Michael Lasser, UBS.
Michael Lasser:
I know this has been asked a few different ways, but maybe you could just tell us what you think the quantitative impact both to your sales and to your margin from the West Coast port slowdown. I think you multiply 16% of your import sales times, assuming it's a couple of hundred basis points lower in those categories in those stores, that would be a 30 to 40 basis point overall impact to your sales. Is that in the right ballpark?
Bob Sasser:
I would tell you, it's anecdotal. This is not the math that you just did, but anecdotally, I think it was more than what you just said. Now it's different by DC. It's different by market. It's different and -- by the way, you had the impact that when we knew that there was going to be a problem, we started shifting things and we started changing the playing field so that it just became hard to quantify exactly. I'd love to do that for you. We attempted to do it. And at the end of the day, we said, well, there's really a lot of judgment here and what sales trend were these stores on before and what sales trend were they then, and what sales trend are they now, how much of those are external factors, how much are created by the port strike. And it's just complex. So we chose to not quantify it. I will tell you we hit the midpoint of our guidance on sales and earnings without the West Coast port strike. It would have been better than that on both lines. Your math is one way of doing it. I would think that it would actually be, in my opinion, more of an impact than what you just penciled out.
Michael Lasser:
And on the margin side, it's going to impact both the cost of goods and SG&A?
Bob Sasser:
Cost of goods and transportation and SG&A in those stores. If you can imagine, you are ready to set and we're planning to set a certain promotion throughout the store and some of that product then is not going to be available for 2 weeks more, let's say. So scrambling to set something else in those locations by those stores, that's more cost. And then when the goods comes in 2 weeks later, you got to change those displays, take that product off, put on what was supposed to be there, put that part -- so it just affects the whole supply chain when things get off to that magnitude. It is always something late and it's always something early. We deal with that it's retail and we deal with that all the time, and we deal with it very well all the time. This was unusual though. This was major ports in the country just really slowed down and snarled up, not only our freight but everybody else's, which put pressure on the whole supply chain then. I said then there was a shortage of railcars and delays because of that, getting the product into the right place, just managing all that became as much as any. So it affected our sales. It affected our margin because it was a high-margin product. It affected our SG&A because we spent more in transportation and we spent more in stores to accommodate these snarls.
Michael Lasser:
And I know these are more shorter-term oriented questions but I think it's important. My last one is you mentioned that you've been pleased with what you've seen in May so far, so presumably you're not going to be pleased with something that is slower than what you experienced all in, in the first quarter. Is that fair?
Bob Sasser:
Let me just say this. I mean, we've given your guidance now for second quarter and for the year. Basically, other than changing for the actual first quarter results, the rest of the year forecast is all but the same. There's, I think, share count changes and things like that, but -- tax rate changes maybe. But basically, the guidance remains the same that we gave you originally for the rest of the year. So I will tell you that it's early on in the first quarter. So it's hard to declare victory right now. But we feel like we started off where we needed to start. We had a good Mother's Day. We were pleased with our Mother's Day sales. We had good response from our customers and the new merchandise as they saw it hitting the counter. Some of the summer merchandise in the West that finally got on to the counter, the customers are loving it. So they're seeing new product that always creates good sales trends.
Operator:
And at this time, we have time for a couple more questions. Next, we'll hear from Charles Grom with Sterne Agee.
Charles Grom:
Just to follow up on the last question, Bob, is it safe to say that those stores on the West Coast are trending closer to the company average at this point in time?
Bob Sasser:
I don't break it out that close, I can't. But I will tell you that the new merchandise is having an impact, and everything is improving on the West Coast and also in the Oklahoma, Texas stores that were serviced from the West Coast port.
Charles Grom:
Great. And then just a 2-part question on the Family Dollar side. Just wondering if you could give us some quantification of how many stores you think you could look to rebanner, which obviously could be a big opportunity. And then from a sales per square foot perspective, clearly, Family Dollar's lagged Dollar General by a wide margin for 5 to 7 years now and wondering if you could opine on why you think that gap exists and how quickly do you think you can raise that sales per square foot level over the next 3 years.
Bob Sasser:
Well, starting with the rebannering opportunity, I'll tell you that it's one of the ones that has probably one of the biggest opportunities we have. I've not quantified the exact number of stores for anyone because it's still changing. But I have said there are hundreds of opportunities to improve the productivity through our rebanner strategy. Again, we see this as one of the largest opportunities as we get the right banner in front of the right customers, the appropriate customers for that banner. It's an opportunity also to take a less productive story and quickly improve the productivity. The process is going to go something like this. Upon completion of the transaction, we're planning to quickly rebanner a small group of test stores to verify that our analysis is correct and that our procedures are efficient and that we are touching the right things in the right order. We're going to closely track that, analyze it, and if necessary, modify processes at that time for, again, efficiency and then proceed to rebanner additional stores in waves. All of our initial rebanners are going to be Family Dollars to Dollar Trees. Once we close and we have complete access to the Family Dollar real estate information and their predictive model, we'll run the same process on Dollar Tree stores to determine if some of them would be more productive as Family Dollar stores and my point of view is that there will be some that should go the other way. But ultimately, our strategy will be to have the banner in each market that best serves the customer of that market and provides the greatest return on investment. Second part of that question was sales per square foot, Family Dollar versus the lagging of sales in square foot. Well, look, it's -- I think as we've gone through, there's a couple of big issues. First of all, the real estate strategy, in our opinion and in what we've seen, is the move more towards the suburban markets has not been as good. The Family Dollar Stores tend to be more productive in those urban and rural markets. And I think again sort of with the merchandise mix going a little more suburban and a little bit away from the diversity customer, the diverse customer, that low-income customer, they have already identified and announced that their high-low strategy was not working. And Howard and the Family Dollar management team rightfully, in our opinion, chose to go back to an everyday low price strategy and they've seen some, by their reports, they've seen some good results from that. And by the way, I think that's the right action, especially with that low-income customer they serve. So why is the sale per square foot lagging? Well, I believe they've gotten away from their customer. I believe by getting back to that lower-income customer owning those opening price points that those customers need so far as merchandise the allocation of space and their stores and providing better opening price points and better merchandising strategy as far as price point, name brand, private label, how do you offer the most value to the customer, expanding the floor plans, expanding those departments that those customers respond more to and shrinking the ones that they don't. So that's it. I believe it's retailing 101. Honestly, I'm not trying to make it sound simple because there's a lot of stores and there's a lot of geography and there's a lot of diversity and there's a lot of competition, all the things that we face as retailers. Nothing is ever simple. But it is very clear to me the missteps and why they're lagging and it is very fixable in my mind. They've already begun some of it and I think we'll absolutely bring more power to that.
Operator:
And next, we'll hear from Paul Trussell, Deutsche Bank.
Paul Trussell:
Just following up on Chuck's question around rebannering. Where does the Deal$ format fit into your thought process? And also, if you can kind of give us some color on how those multi-price point stores performed this quarter. Also, as you think about your Canada operations, is Family Dollar an opportunity for rebannering or opening up stores in that market? And also, when it comes to your store growth going forward, obviously, 7% year-over-year square footage growth for the Dollar Tree banner, how should we think about the growth potential for the combined entity?
Bob Sasser:
You've exceeded my ability to remember all those questions, but let me start with a few that I can remember, Paul. They're all good questions. Deal$, we have great excitement around our Deal$ brand. We built it from the beginning. Organically, we bought a company called Deal$ from SUPERVALU, which was mostly a single price point company and we've transformed it into a multi-price point banner that sells -- we've lifted the restriction of the price point to sell more product and more assortment and serve more customers. We like where we are with that at Deal$. Everything is not $1, but everything is a value. The mix in a Deal$ store is a little -- is not exactly like a Family Dollar Store, it's a little more discretionary product, whereas Family Dollar is 70-plus percent consumer products, Deal$ is more like 60% consumer products. So it's more of a 60/40 split. We think the Deal$ brand has made some inroads into the suburban markets with the multi-price point strategy, and we think the acquisition and the merger of Family Dollar will just only help that. Now down the line, I can't tell you that Deal$, a location here or there, there's 200-plus Deal$ stores, I can't tell you that location here or there might not change to any of the others, but that's not contemplated at this point in time. It's -- my goal is to continue to build the Deal$ brand at this point. Family Dollar in Canada, I think Family Dollar would be terrific in Canada. I think the Canadian market would respond very well to another, a value -- a multi-price point value retailer like Family Dollar. So down the line, over the course of the future, at some point, we will consider aiming that. Right now, as I know you know this, we are focused, we are laser-focused on closing this deal and integration. And we need to get the companies integrated. We need to get the infrastructure reallocated. We need to get the merchandise mix reassorted. We need to get the customers reengaged. We need to do a lot of things with the integration. So anything that we would do with Family Dollar in Canada would come more than 3 years out probably, sometime off into the future. We're going to stay focused on integration and the combination as long as we need to.
Randy Guiler:
7% growth.
Bob Sasser:
7% growth, I'm not sure what your question was there but...
Paul Trussell:
Just commenting on the square footage growth of the combined entity. Will you be open -- you said you will initially convert or rebanner some Family Dollars into Dollar Tree as a test. Will you continue the store opening plan that Family Dollar has initially outlined?
Bob Sasser:
We will continue to open up new Family Dollar stores. It will be -- I think they've already pulled back from their original plan. I'm not really sure on that. Basically, you got to ask them on that right now, we don't own the company, but I believe they pulled back on where they were at their high store openings for sure. They've reduced their new store opening not because there's not plenty of room for them but because as they looked at their business, they weren't happy, as we wouldn't be happy, with the productivity of those new stores and they were pulling back as they were reviewing their strategy again, changing to everyday low price, reassorting the stores to a large degree. So 2 questions there, one is, I'll try to answer it, for the near term, I believe the Family Dollar brand, we will continue to open new stores but it will be at a reduced rate would be our plan for the near term. For the long term, there are huge opportunities for growth in the Family Dollar brand, and again, I believe the management team there has set the potential for 12,000 Family Dollar stores in the U.S. and I think that's probably right. Alongside growing our Dollar Tree brand, we have not changed our Dollar Tree growth or square footage or square footage growth strategy. Now we will have to take a look at how many stores can you rebanner and how many stores can you open and how many stores should you open at one time. As always, we will do this very methodically and very thoughtfully, and we will do it as efficiently as possible. We're driven more by doing it right than by the numbers, but anecdotally, I'm not looking to pull back the growth on Dollar Tree.
Paul Trussell:
And just lastly, a quick P&L question for Kevin. As we look to the second quarter going forward, there was a negative impact from the opening of the Windsor DC, I believe, in 2Q last year. How should we think about gross margins as you lap that? Should there be a favorable bounce here in this upcoming period? And what comp do you need to produce SG&A leverage in the next quarter and the second half?
Kevin Wampler:
As it relates to the Windsor DC, we actually opened that in June of 2013, so it's been open almost 2 years now. So again, it does -- we did take a hit back at that point in time and felt that for the better part of a year. That DC continues to become more efficient as we continue to add stores to it. It opened up, obviously, with less than a full load of what its capacity would be and it's ramped up over time and it probably has a little bit more capacity left. So again, we're always looking to get more efficiency out of our distribution centers, but don't necessarily -- I don't feel like there's a large benefit coming in the second quarter because of that. And then as far as the second part of your question, Paul, related to what comp does it take to leverage SG&A, I mean, I think historically we have said a 2% to 3% comp will typically get us some leverage, a little leverage. It did not this quarter. I think if you go back a year ago in Q1, we had a 2% comp and we have 40 basis points of leverage in SG&A. So as I've stated before, it ebbs and flows depending on what's going on in the business and what kind of initiatives we may or may not be driving through the company. So -- but I still think that roughly 3% comp is -- 2% to 3% comp is a reasonable range to think about as far as leveraging SG&A.
Operator:
And our final question comes from Dan Binder, Jefferies.
Daniel Binder:
I just had a question as it pertains to the integration process. If I think back to your Canadian acquisition, as I recall, there was a little bit of bumpiness early on in the integration. I'm just curious if you can refresh our memories on what those issues were, what your learnings were and how you can apply that to the Family Dollar integration.
Bob Sasser:
Well, fair question. I will tell you that it was a much smaller acquisition, but it was a total -- it was a whole new country and it wasn't the 51st state. Canada is clearly a different country, regulatory requirements, culturally, language, believe it or not, duplicate labels or languages on your labels. There's a lot of intricacies in entering Canada. I thought we handled most of them fairly well. The big challenge that we've had in Canada, in my opinion, is, first of all, even though people you would think would be aware of the brand is we had no brand density. So we've rebannered all those -- rebranded all those stores early on to Dollar Tree Canada from Dollar Giant because we didn't think Dollar Giant had any brand equity either. We built more stores. And as we're getting more market density, we are building brand awareness and we're seeing some of the improvement now. So that's one of the things. Secondly, we had to build a brand-new management team and Canadian merchants and get that in place. So as always, the devil is in the details and most of the time, it's people, people, culture. Family Dollar is not a different country, but it's a different -- a little different culture. It's a different concept, and we have to be very -- we have to work together very well. It's one of the learnings that I would say on any acquisition we've ever done, it really comes down to the people and the culture and the motivation. To that, having said that, I really have great admiration for the Family Dollar organization. What they do, they do some things much better than we do, and we see that and we are happy to join in on the things that they do better and there's some things we think we can lend to the Family Dollar team also. And they've been very open to anything that we talk about so far. They're still running their own business, we don't own the business yet. But in our discussions, pre-integration discussions, we're always talking about those types of things and cultural things and how do we benefit from the combination and where's the opportunity to reduce costs, increase margin and drive sales. So we are of one mind of that. But that's really the big learning, I guess. And over my history and years of doing this, we've done several acquisitions. I've always asked other people that do acquisitions, so tell me one thing we ought to be very careful of and it's always a people issue. It's always about culture. It's always about combining a diverse organization, a different organization. There are egos involved that have to be respected and, of course, everybody has a role. You got to get everybody pulling together. So we're aware of those things. I think we're going to be just fine as long as we stay aware of it. I've shared this with our management team and with our organization. And by the way, I've also shared that we own that part, not the Family Dollar people. We own the concept of bringing them in with respect and respecting what they've done and what they've built over 50-some years, building that brand, the infrastructure that they built that is very strong and very solid, the organization that they've built, the technology that they've built, the process and procedures. So it's up to us to engage with them and to bring these 2 cultures together.
Daniel Binder:
And then just as a follow-up, I was curious, you talked a lot about operational improvement. How do you feel about price reinvestment? Just trying to reconcile your earlier comments about benign pricing environment yet their results have been still a little bit soft. Do you think there's a need for further price investment to get those sales per square foot up?
Bob Sasser:
I don't think it's as simple as that. I think it's a little bit of that, it's a little bit of this, but it's more about the merchandise assortment. There are many ways to bring value to a customer, especially a low-income customer. What they -- what a low-income customer needs may be not the same as someone with a higher-income level. And what I mean by that is as we go through the assortments, there's price competitiveness. We would intend to be competitive in the market on all the name brands, on all the same items. That's sort of cost of poker. If you're going to be in this business, you have to be competitive on the name brands and the same items. I think there's an opportunity for product development. They have some pretty good private labels already. I think there's probably more room for that in rationalizing the assortment so that every item has a place, every item has a mission. What's the value statement in the category? And is it good, better, best? Is it private label versus name brand? Is it twice as much for the same price or is it the same amount for half the price? I think more attention to opening price points. A customer that has limited income may want that biggest package of the name brand but they -- and it may be very competitive. You can buy it for the same price anywhere, but you may just not have that much money in your pocket. So you may also have to have an option for that customer that says it may not be the name brand but it's a big jug of whatever and it really works and we stand behind the quality and all that goes with that. So it's not as simple as just saying price reinvestment. I believe we can lower retails and improve margin. But having said that, I'm talking about the mix, frankly. And we're going to be very focused on that customer, especially that low-income customer, what they need, what the price points are that really motivate them. How do we deliver value overall with a combination of name brands, private labels. And then also the discretionary product. I believe that people -- even if you're poor, you don't want to feel poor. When you walk into the store, you want a shopping environment that you're happy with that respects you as a human being and offers you the things that you need. So a lot of effort is going to be focused on the store and on the customer from day 1. And we will invest. I would say, more than price investment, I would say investment in the stores is where we're going to be really focused. Now we're going to have to pay for that somehow. There is no free investment. So we're going to have to look really hard at where we can find the synergies and the opportunity to reduce costs in order to reinvest in the stores. Some of it may be price, some of it may be anything that increases the value to that customer, might be the shopping experience too, and I believe there's big opportunity in that.
Operator:
That does conclude our question-and-answer session. I'd like to turn it back over to Mr. Guiler for any additional or closing remarks.
Randy Guiler:
Thank you, Amy. Thank you for joining us on today's call and for your continued interest in Dollar Tree. We look forward to providing an update on our next earnings call currently scheduled for Thursday, August 20.
Operator:
And thank you. That does conclude today's presentation. Thank you for your participation.
Operator:
Good day, everyone, and welcome to the Dollar Tree, Inc.'s Fourth 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.
Randy Guiler:
Thank you, Dana. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the fourth quarter and full year fiscal 2014. Our call today will be led by our CEO, Bob Sasser, who will share insights on our performance and an update on our business initiatives. Kevin Wampler, our CFO, will then provide a more detailed review of our financial performance and details related to our initial outlook for 2015. 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 current report on Form 8-K, quarterly report on Form 10-Q and annual report on Form 10-K, which are on file with the SEC. We have no obligation to update our forward-looking statements, and you should not expect us to do so. Unless otherwise noted, all margin, net income and earnings comparisons presented today exclude the impact of the Family Dollar Stores acquisition-related costs for the fourth quarter and full year. Acquisition-related costs for the fourth quarter and full year are included in the adjustments column of our income statement included in today's earnings release. At the end of our prepared remarks, we will open the call to your questions. [Operator Instructions] Now I will turn the call over to Bob Sasser, Dollar Tree's Chief Executive Officer.
Bob Sasser:
Thanks, Randy. Good morning, everyone. This morning, we announced Dollar Tree's results for the fourth quarter and full year fiscal 2014. For the quarter, same-store sales on a constant currency basis increased 5.6%. Total sales grew 10.8% to $2.48 billion. Operating income increased by $42.1 million or 12.1%, and operating margin for the quarter was 15.8%, a 20 basis point improvement from the prior year's fourth quarter. Net income increased 12.2% to $239 million, and adjusted earnings per diluted share increased 13.7% to $1.16 compared with fourth quarter 2013 earnings of $1.02 per diluted share.
For the full year fiscal 2014, total sales increased 9.7% to $8.6 billion. Same-store sales on a constant currency basis increased 4.4% as a result of a 3.4% increase in traffic and a 90 basis point increase in average ticket. Operating income increased by $98.4 million to nearly $1.07 billion. Operating margin was a sector leading 12.4%, a 4 basis point increase versus the prior year. Net income was $645.6 million compared with $596.7 million last year, and adjusted earnings per diluted share was a record $3.12, an increase of 14.7% compared with $2.72 per diluted share last year. I'm extremely proud of our team's performance in the fourth quarter and throughout 2014. We have great momentum in our business as we serve a very loyal and growing customer base. In fact, in 2014, for the first time in company history, we exceeded 1 billion customer transactions in a year. Our results continue to validate that Dollar Tree is part of the solution for millions of consumers, as they strive to balance their household budgets. Our merchants continue to deliver product that exceeds customer expectations, and our store teams consistently provide a clean, fun and friendly shopping experience. Our focus continues to be on serving our existing customers better, while taking every opportunity to gain new customers in every store every day. Our operating margin continues to lead the discount retail sector, while our values are greater than ever and our prices, as always, are just $1 per item. Our customers know that at Dollar Tree, you can splurge. Yes, you can afford it at Dollar Tree. Same-store sales were solid and accelerated throughout the quarter. Performance in the home, seasonal and basics divisions were tightly grouped and our sales increase resulted from strength in both basic consumables and discretionary products. Top-performing categories include party supplies, household products and food. Additionally, sales performance in the fourth quarter was relatively consistent across the country, with all zones achieving positive same-store sales increases. Our merchandising teams put together a terrific plan for the fourth quarter and the store teams work together to execute the plan. Immediately following Halloween, the stores transitioned swiftly for the upcoming holidays. When our doors opened on November 1, store presentations boldly communicated Dollar Tree was the go-to store for our customers' Thanksgiving and Christmas needs. In early November, we focused on first of the month consumables, including Thanksgiving-related foods like chicken broth, vegetables and soups. We placed emphasis on taking care of the customer needs related to holiday meals, with baking basics, mixing bowls, foil pans, Turkey basters and food storage containers, and we addressed the customer's 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, mints and party mix, all for $1. Immediately following Thanksgiving, our stores made a swift transition to holiday decorations, Toyland and great gift ideas. This year, merchants and storage worked together to build upon last year's introduction of the Last 10 Days 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 the gift supply headquarters for items like holiday tins, gift bags, tissue, wrapping paper, scissors and tape. If you need to wrap it, bag it, box it or tag it, Dollar Tree is the store for you. In addition to our seasonal energy throughout the quarter, our stores continue to highlight and promote our million dollar brands that provide great values to our customers. These are brands they know and trust like Downy, paper towels, Crest toothpaste and many more. Following the Christmas holidays, our stores transitioned quickly to party supplies for the big game season. At Dollar Tree, we operate in an environment of continuous improvement, always striving to improve from season to season. We ended the year with our inventory clean, well-balanced and stores prepared for the new fiscal year. Our Valentine's Day season was terrific, and our sell through was solid. Looking forward, we're positioned for increased relevance to our customers, sustained growth and improved profitability. We have many opportunities to continue growing and improving our businesses through opening more stores, increasing the productivity of all stores and further developing our newest formats, new markets and new channels as growth vehicles. In the fourth quarter, we opened 90 new stores and we relocated and expanded 6 existing stores for a total of 96 projects. For the full year 2014, we exceeded our new store target of 375 stores and opened 391 stores. Total square footage increased 7.4% over the prior year and we ended the year with a total of 5,367 stores across 48 states and 5 Canadian provinces. I'm extremely pleased with improvements in our inventory management. In 2014, we added 391 new stores and 3.2 million selling square feet, yet our overall inventory dollars remained essentially flat to the prior year and our inventory turns improved approximately 30 basis points. Our seasonal sell through was strong. Our basic in-stock was maintained, and when the customers were shopping, our stores were ready. Thanks to the efforts of our merchant, logistics and store teams, we started fiscal 2015 on plan with clean inventories, well-prepared to support first quarter 2015 sales plans. For the full year 2015, our plan includes the opening of approximately 400 new stores and 75 relocations for a total of 475 projects across the U.S. and Canada. Square footage is planned to increase 7.2% over fiscal 2014. In addition to new stores, we continue to execute our strategy on improving productivity in our existing stores. The components of this strategy include, first of all, category expansions. Our customers are finding more value as we continue to rationalize and expand assortments in pet supplies, hardware, health care, beauty and eyewear, as well as home and household products. Customers are continuing to respond favorably to our powerful and relevant seasonal and party presentations. Our seasonal assortments continue to create merchandise energy as our storefronts change with the seasons. At Dollar Tree, we strive to own the seasons at the $1 price point. Store teams continue to focus on customer engagement in our stores and especially at the checkout counters to drive impulse and related item sales. We are keenly focused on providing value and a shopping experience that exceeds the expectations of every customer in every store every day. Being first-of-the-month-ready is important to our customers. Our merchants and our store associates place increased emphasis on displays of basic consumable core items at the first of each month when more customers are shopping for their basic needs. Additionally, we're continuing the expansion of our frozen and refrigerated category. In the fourth quarter, we installed freezers and coolers in 82 additional stores, bringing our 2014 total to 473 additional stores. We currently offer frozen and refrigerated product in 3,621 stores with plans to continue adding this important category to more stores. Frozen and refrigerated merchandise is generally lower margin, but it is fast returning, more frequently purchased and the increase in shopping frequency provides Dollar Tree the opportunity to drive incremental sales across all categories, including the higher-margin discretionary product. Most importantly, the product serves the needs of our customers. In addition to new Dollar Tree stores in the U.S., Dollar Tree Canada and Deal$ are key brands in our portfolio and key components of our growth strategy. In fourth quarter, we continued to grow our store count in Canada by adding 5 new stores. For the full year 2014, we added 30 net new stores, expanded 2 stores and ended the year with a total of 210 Dollar Tree Canada stores. We are building the merchant and store teams in Canada to better serve the Canadian customer. Leveraging the buying power of Dollar Tree, our merchants are sourcing higher value product and our Canadian customers are finding broader, more exciting assortments and better values in the stores. We're pleased with the progress we're making in Canada, and in fact, the fourth quarter comp for Dollar Tree Canada was the strongest quarter yet. We have significant growth potential in Canada. We're confident the Canadian market will support up to 1,000 Dollar Tree stores and this is in addition to the 7,000 store potential for Dollar Tree in the United States. We want to be recognized by customers as the leading retailer in Canada at the single price point of $1.25 just as we are in the U.S. at the $1 price point. Our Deal$ format further extends our ability to serve more customers. By lifting the restriction of the $1 price points, we have the opportunity to serve more customers with more categories. Deal$ stores provide low prices on everyday essentials, party goods, seasonal and home product. The stores operate using a multiple price point strategy, and they have the potential to generate higher store volume with a higher average ticket. We ended the year with a total of 219 Deal$ stores. In addition to Dollar Tree, Dollar Tree Canada and Deal$, our online business at Dollar Tree Direct is growing in size and performance. Dollar Tree Direct provides an opportunity to broaden our customer base, drive incremental sales, expand brand awareness, and attract more customers into our stores. In the fourth quarter, we significantly enhanced the functionality of the site's search feature on our website. Now when customers search for a specific product, it provided relevant and related content for the product, including videos, craft sheets, ratings and reviews. Our Dollar Tree customers are crafty, savvy, frugal and connected, and this enhanced site search functionalities placed all those traits. Also, in Q4, Dollar Tree Direct introduced a new holiday Christmas section of our website. This section has provided a video, an interactive game and many great holiday craft and gift ideas. Based on a number of customers both old and new that flock to the site, we know it was a big hit. We continue to leverage social media to connect with customers. A few examples of our growth includes our loyalty program, called The Value Seekers Club, which has grown nearly 80% over the past 12 months. Our email subscriber database has grown 26%, and our Facebook fan base has increased by 31%. Social media continues to provide tremendous opportunities to communicate about exciting events and great products both in our stores and online. Whether customers prefer to contact Dollar Tree Direct via their phones, their tablets, their laptops or their desktops, we're ready and able to connect with them. We continue to be very pleased with the growth of both sales and visitors to our Dollar Tree Direct business. Please check us out at DollarTree.com. Now I'll turn the call over to Kevin to provide more detail on our financial metrics and our initial outlook for 2015.
Kevin Wampler:
Thank you, Bob. As Bob mentioned, our adjusted fourth quarter earnings increased 13.7% to $1.16 per diluted share. Once again, we are very pleased with another quarter of strong same-store sales. Our constant currency 5.6% comp sales performance was composed of a 5% increase in traffic and a 0.5% increase in average ticket. Geographically, our performance was strongest in the Midwest and Southeast, as well as markets where we cycled significant weather disruptions from a year ago. In our previous 8-K, we announced our same store sales for the first 2 months of the quarter was 5.2%. January was our strongest comp month of the quarter as we're cycling a large number of weather-related store closings from the prior year.
Starting with gross profit, our gross profit margin was 37.1% during the fourth quarter compared with 36.9% in the prior year fourth quarter, an increase of 20 basis points. The improvement was a result of the following:
we gained 30 basis points of leverage in occupancy and distribution costs resulting from strong same-store sales; we experienced higher initial markup and reduced markdowns across many categories. The higher IMU reflects continued improvement in sourcing and the flexibility of our merchandise model. Overall, merchandise mix contributed to margin rate. However, it was offset by our commitment to provide greater value to consumers in order to drive traffic and capture share. We continue to be pleased with the results we are seeing. Freight cost as a percentage of sales increased, as domestic trucking rates were higher, reflecting the effects of industry-wide driver shortages. The increase was partially offset by lower diesel cost.
Excluding acquisition-related costs, SG&A expenses were 21.3% of sales for the quarter, flat compared to the fourth quarter last year. Payroll-related expenses increased 25 basis points for the quarter as store bonuses, retirement plan contributions and incentive compensation increased based on the company's strong performance. These are partially offset by reduced store payroll due to improved productivity and lower worker's compensation expenses. Store operating and corporate costs improved in the areas of utilities, repairs and maintenance, store supply, legal fees and depreciation, offsetting the payroll-related expense increase. Adjusted operating income increased $42.1 million compared to the fourth quarter last year, and adjusted operating margin improved 20 basis points to 15.8%. For full year 2014, our operating margin was 12.4%, consistent with last year despite persistent freight cost headwinds related to the domestic driver shortages in the trucking industry. The tax rate for the quarter was 36.6% versus 37.2% in the fourth quarter last year. This decrease was due to the reenactment of the work opportunity's tax credit for 2014 in the fourth quarter. For the full fiscal year, the tax rate was 37.3% compared with 37.5% in 2013. Looking at the balance sheet, cash and cash equivalents at year end totaled $864.1 million versus $267.7 million at the end of fiscal 2013. Our consolidated inventory at year end was flat to last year, while selling square footage increased 7.4%. Consolidated inventory per selling square foot actually decreased 6.9%, and our inventory turn improved 30 basis points to 4.4x for the year. We believe the current inventory levels are appropriate to support scheduled new store openings and our sales initiatives for 2015. The company uses the retail inventory method to assign costs to store inventories. In fiscal 2010, the company made an inventory accounting change for its U.S. operations going from one inventory pool to approximately 30. Effective February 1, 2015, the first day of fiscal 2015, the company will adopt the same method for our Canadian operations. This change will facilitate improved decision-making, and further enhance our assortment planning process. The company expects to record a non-recurring, noncash charge to gross profit and a corresponding reduction in inventory at cost of approximately $3 million or $0.01 per diluted share for the first quarter of 2015. This impact is included in our guidance. There will be no effect on prior periods related to this change in inventory accounting. Capital expenditures were $71.2 million in the fourth quarter of 2014. This compares with $46 million in the fourth quarter last year. For the full year 2014, capital expenditures were $325.6 million, which was below our prior expectation of $360 million to $370 million, and compares with $330.1 million in 2013. For 2015, we are currently planning consolidated capital expenditures to range from $465 million to $475 million. Capital expenditures are focused on new stores and remodels, including additional fee development stores, the addition of frozen or refrigerated capability to approximately 320 stores, IT system enhancements, the construction of a new Southeast distribution center and the expansion of our current Olive Branch, Mississippi distribution center. Please note that upon completion of the Family Dollar transaction, we may reconsider our 2015 capital expenditure plan based on a comprehensive review of the combined distribution network and related capacity. Depreciation and amortization totaled $54.4 million for the fourth quarter versus $50.3 million in the fourth quarter last year. For 2014, total depreciation was $205.9 million, a 4 basis point improvement from last year. For 2015, depreciation and amortization is estimated to range from $215 million to $225 million. Our initial outlook for guidance for 2015 includes the following assumptions. We anticipate that freight costs will continue to be a headwind to gross margin for the year based on continued pressure on freight rates. We are budgeting lower diesel fuel costs than a year ago. As you have noticed, weather has presented early challenges throughout most of our Northern and Midwestern areas to this point in the first quarter. Easter will be 2 weeks earlier than the prior year, which represents an estimated $8 million headwind to sales. We are pleased to see agreement was reached last week in related to the West Coast ports. We may continue to experience some product delays as the port congestion is relieved in the upcoming months. The previously mentioned noncash charge of $0.01 per diluted share relates to the inventory accounting change, and we do not anticipate any share repurchases in 2015 and we cannot predict future currency fluctuations so we do not adjust our guidance for any potential changes in currency rates. Our guidance also assumed a tax rate of 38.4% for the first quarter and 38.3% for the full year. Weighted average diluted share counts are assumed to be 206.9 million shares for the first quarter and 207.1 million shares for the full year. For the first quarter 2015, we are forecasting sales to range from $2.15 billion to $2.20 billion, and diluted earnings per share, excluding acquisition cost, in the range of $0.69 to $0.74 which would represent a 3% to 10% increase compared to the first quarter of 2014 earnings of $0.67 per diluted share. The sales range implies a low- to mid-single digit comparable store sales increase and 6.9% square footage growth. Additionally, we have not included any acquisition-related cost in our first quarter guidance, as we cannot currently forecast the timing of when these costs will be incurred. For the full fiscal year of 2015, we are forecasting sales in the range of $9.21 billion to $9.45 billion based on a low to -- low-mid-single digit increase in same-store sales and 7.2% square footage growth. Diluted earnings per share, excluding acquisition-related cost, are expected to range from $3.30 to $3.50. This represents an increase of 6% to 12% over 2014 earnings per diluted share, excluding acquisition-related cost of $3.12. Before I turn the call back over to Bob, I did want to address one question that some of you expressed. Following the completion of the Family Dollar transaction, we will adopt segment reporting. This will provide you with the visibility into the performance of both Dollar Tree and Family Dollar on a standalone basis. I will now turn the call back over to Bob.
Bob Sasser:
Thank you very much, Kevin. Before going to Q&A, I want to make a few comments on our pending acquisition of Family Dollar. I'll tell you that we're more enthusiastic about the transaction today than when we originally announced our merger agreement in late July. We are extremely encouraged to see the overwhelming support from Family Dollar shareholders on their January 22 vote. Their approval was a crucial step in our moving forward with the transaction that will create a leading discount retailer in North America. I am pleased that throughout the process, Dollar Tree remained committed to its strategy, and was able to gain shareholder approval without increasing our offer. I would like to personally commend Family Dollar's team members on their efforts over the past 7 months. While their reported results have not been stellar, we acknowledge that they've been operating through unique circumstances with great uncertainty regarding the future of the Family Dollar business and we're eager to welcome Family Dollar associates to the Dollar Tree team. We appreciate the dedication and efforts of Family Dollar's associates throughout the integration planning process, and we look forward to working together to further grow and improve the Family Dollar brand.
The strategic rationale for this combination is powerful. We are combining 2 very large companies with more than 13,000 stores achieving almost $19 billion in sales, and more than $2 billion in adjusted EBITDA. We're combining 2 established and respected brands in the most economically resilient sector of retailing. The discount retail sector has flourished through all economic cycles. We're combining 2 complementary business models across fixed and multi-priced strategies, creating the ability to serve a broader range of customers and geography. The Dollar Tree target customers is largely a suburban customer, while the Family Dollar customer is largely urban and rural. We're combining complementary merchandise expertise, adding the Family Dollar strength and name brand consumable products to the Dollar Tree variety, seasonal and discretionary product and global sourcing power. This combination generates significant immediate opportunities for operational improvement and near-term opportunities for synergies. We have identified the opportunity to realize at least $300 million in annual run rate hard cost synergies by the end of year 3. We have categorized these synergies into 4 primary categories and have ranked them in order of magnitude. First is sourcing and procurement. Opportunities here will include lower cost of products through leveraging the size of our buys, rationalizing our vendor base, driving scale with common vendors, increasing direct-to-factory sourcing and increased efficiencies through global sourcing and the supply chain. Second is format optimization. We will operate and grow both banners, and we plan to re-banner stores selectively to better match the brand to the market demographic, and to improve the productivity of the store. Most of the early re-bannering will be Family Dollar Stores to Dollar Tree stores. Next is reduced overhead. Over time, we will reduce cost through shared services, reducing redundant public company and board cost and through systems integrations, and last, distribution and logistics through scale and operational efficiency. We expect to reduce inbound and outbound freight cost, both domestic and international. Additionally, primary areas of our initial focus will include, first of all, the customer. A focus on the needs of the value customer and delivering the merchandise assortment that serves their needs and their wants. This will include a mix of name brand and private label basics alongside variety and seasonally relevant product. We will continue to return to EDLP and delivering value at competitive prices. Second, productivity. We will focus on improving sales per foot and inventory productivity by expanding high-performing categories and eliminating products that do not meet our sales and profitability threshold. We plan to focus on the customer experience, and improving the table stakes by developing plans to consistently deliver the promise of a bright, clean and friendly store to shop. We will be tracking key metrics to monitor progress. We plan to focus on reducing field management turnover and providing appropriate incentives to the people who directly serve our customers. We plan to improve our new store remodeling expansion performance with a keen focus on profitability, improvement and metrics and ROIC. Overall, we will bring a disciplined approach to driving a key strategic initiative and a performance-oriented culture to the larger company through improved communications, analysis, collaboration and incentives. We are confident that placing our initial emphases 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 tell you that both companies are ready to integrate. The lengthy delays through this process have afforded us a significant amount of time to focus on integration planning. Our integration management office is comprised of 10 functional teams that have detailed strategies, objectives and task with assigned milestones for achieving these tasks. Our functional teams are dedicated to cost of goods sold, supply chain, indirect spending, merchandising, finance, human resources, information technology, general and administrative cost, including legal, internal audit and others, real estate and store operations. Our team is incredibly excited about this transformational opportunity to grow our business for the long term by adding the Family Dollar banner to the Dollar Tree portfolio of brands. As always, we will manage this business with a focus on what is best for our stakeholders, including our customers, our vendor partners, our associates and importantly, our long-term shareholders. Now back to Dollar Tree. As I previously mentioned, I'm extremely proud of the team's fourth quarter and full year performance, and I'm incredibly excited about Dollar Tree's future. The Dollar Tree business model is powerful, flexible and more relevant than ever, providing extreme value to customers while recording record level of earnings. Our model has been tested by time and validated by history. For 7 consecutive years, quarter-after-quarter, Dollar Tree has delivered same-store sales increases of more than 1% every single quarter. Consumers are looking for value no matter the state of the economy. For 6 consecutive years, our annual gross margin rate has exceeded 35%. At Dollar Tree, we are in control of our gross margin rate. It's all about the mix and having an extremely disciplined approach to sourcing product for our stores. We have consistently delivered solid margin rates through both inflationary and deflationary cycles. Our expenses are managed effectively, focused on overall returns. And as a result of driving sales, managing margins and controlling expenses, we have delivered 5 consecutive years of double-digit operating margins that continue to lead the discount retail sector. We remain committed to the concept our customers love, and we are positioned for continued profitable growth for many years ahead. We have a talented management team that has a long history of retail success, and importantly, with the addition of Family Dollar, we will be a bigger, stronger and more diversified business, better able to serve more customers and more markets with exactly what they're looking for, great value. Such a great time to be Dollar Tree. Our inventories are clean and fresh. The shelves are full of the right product for the first half of 2015, and our values have never been better. Operator, we're now ready for questions.
Operator:
[Operator Instructions] And we'll take our first question from Michael Lasser with UBS.
Maximillian Aggrey:
This is Max Aggrey, on for Michael Lasser. As we kind of look at the full year and your operating margin, you guys have performed pretty solid gross margins. But as you're bringing on Family Dollar, how should we start to look at that, especially as you're going through the heavy lifting of the integration starting with banners and systems before we get to maybe some of the logistical synergies?
Kevin Wampler:
Max, this is Kevin. Obviously, we're not at a point to specifically speak to those type of metrics at this point in time. I mean, as Bob pointed out, there is a lot of integration work being done. The team's comprised of folks from both organizations working very hard, determining where the efficiencies can be gained and taking the best practices from both companies and looking at the way we can improve. So obviously, when we talk about -- we've talked about the $300 million run rate synergies at the end of year 3, and beyond what we've said today, we're not really ready to say anything else as it relates to specific numbers of the ongoing combined organization.
Maximillian Aggrey:
Okay. And also just with your online business, it seems like you guys have been doing a lot of great performance there with Dollar Tree Direct, and you mentioned that the demographics of that customer might be a little different. Could you maybe expound a bit on that?
Bob Sasser:
Well, I think the demographics are Middle-America. It's people looking for value. It's -- in addition to that, it's small businesses, it's organizations that need larger quantities, that may need full-case quantities. Our average ticket on the online business is much higher. It's much higher than it is in our stores. So it's really a broad swathe of Middle America with small business and organizations and schools and individuals that just may need a little extra for a party or to see the great value that we have. In addition to that, Max, it's a terrific opportunity for us to connect with our customers directly, to understand who our customers are, to communicate through our Value Seekers Club to know who they are, what they want, what they want to buy, and to share with them our upcoming promotional events, what's new in our stores and just the Dollar Tree and Deal$ story. So it's -- really, it serves both means to sell product, to serve the customer, and also to continue to drive on the Dollar Tree brand.
Operator:
And we'll take our next question from Anthony Chukumba with BB&T Capital.
Anthony Chukumba:
I guess my first question was could you give us a little bit of an update on Deal$? I mean, I know you mentioned that Dollar Tree Canada had its strongest comp yet, and I just wonder if we could get just a little bit more color on how Deal$ performed in Q4.
Bob Sasser:
Sure, I'll be happy to do that. We -- first of all, we end of the year with 219 Deal$ stores, and we don't break out our comps separately, but I would tell you that our comps were single-digit positive in our Deal$ stores. As the trend has been, we have a merchandise mix of both consumables and discretionary products that does more consumable than discretionary in our Deal$ stores. It's -- in the fourth quarter, of course with all of the holiday needs and all the holiday priority merchandise that we have in those stores, consumables were 56.4%, which is down a little bit. It's usually about 60%, and our non-consumables, up a little bit, 43.6%. So because of the holiday, we're able to sell a little more discretionary and seasonal product in our Deal$ stores. The basket, the average ticket basket, when we had items that are greater than $1, it was $15.62 and more than half of all transactions, 52.3% had items greater than $1 in them. So our customers are understanding the merchandise and are understanding the assortment. They're responding appropriately. Average unit retail, average retail of one item that they bought was $3.35 in our Deal$ stores, and the greater than $1 item represented 51% of the Deal$ total sales. I will tell you that our strongest sales growth comps by category in the Deal$ business in fourth quarter were Christmas textiles, cleaning supplies, household plastics, had a terrific quarter, and our electronics department, driven by phone and tablet accessories did very well in the fourth quarter.
Anthony Chukumba:
Okay, that's really, really helpful color. And then just one quick follow-up, you mentioned the possibility of rebranding -- or I guess changing some Family Dollar stores to Dollar Tree and maybe even doing some vice versa. I mean, what about Deal$, I mean, would you consider any -- changing any Deal$ locations to Family Dollar or Family Dollar locations to Deal$?
Bob Sasser:
I think so. We haven't run those models yet, what -- as opposed to -- what we've done is we've taken the -- our real estate model and ran the Family Dollar stores through them to especially on the lower-performing Family Dollar stores to see how they would perform as a Dollar Tree, and we've -- that's been our first priority, was to take a look at the Family Dollar underperforming Family Dollar Stores that would perform better as Dollar Tree stores, but Deal$, certainly, Deal$ to Family Dollar, Family Dollars to Deal$, certainly could be a part of the future also.
Operator:
And we'll go next to Charles Grom with Sterne Agee.
Charles Grom:
Just when we look at 2015, how should we think about the puts and takes on the gross profit margin front and looking at even maybe into 2016, at what point do lower energy costs start to help you guys out on the sourcing side?
Kevin Wampler:
Chuck, I think, as we look at it in 2015, we've got -- thinking about the fact that as we've said, freight rates in general are going to continue to be higher for us in the sense that we took certain rate increases last year for certain distribution centers. We have some distribution centers this year that will take rate increases as well. Obviously, the offset is -- a partial offset is the fact that diesel is, today, running roughly $2.90 versus running, I think, last year in Q4 it was about $3.85. So it is down significantly which is the help to offset it. I think we look at the fact that we want to continue to drive sales. You've seen the -- we had some great success this year with investing in some brand products that -- our wow items to our consumers, the brands they know, brands that they love to be able to get at the dollar price point, and emergence has done a great job of sourcing those items and putting them in. So I think we'll continue to look at that at driving sales. I think on an overall basis, next year, I think again at a low- to -- to low, mid-single digit comp, we expect to see a little bit of leverage on occupancy, as we have traditionally, in the last few years. So I think, overall, depending on where freight comes out, I think we're looking at gross profit flat and to up or down 10 basis point is kind of the way we think about it. And again, it's always about managing through the business where there are items that our freights' up. We got to find ways to offset that within our business model, and that's the way we're always thinking about it.
Charles Grom:
Okay, that's great. And then just as a follow-up, in light of the Walmart news last week and even TJ Maxx this morning, I'm just wondering if you guys feel like you need to raise your wages for your associates to stay competitive, and if you factor any of that into your guidance for this year.
Bob Sasser:
Well, Chuck, we watch the industry trends carefully, and of course, we're compliant with all the state and federal regulations. But I'll tell you, outside of complying with the continued changes in the regulations, we've made no plans for a sweeping change to our minimum wage rates. But we will continue to pay competitive wages, market by market, just as we always have done based on the prevailing rates. And as always, we'll work very hard to offset any wage increases and cost increases, in general, through increased sales and productivity enhancing initiatives that we've always been able to find.
Operator:
We'll go next to Matt Nemer with Wells Fargo Securities.
Matt Nemer:
First, there was a slight change in the language around your comp guidance versus the last few years. You've guided to low singles this year, a range of low single to low single to mid. Just wondering what drives the confidence in stronger sales growth this year if you could just point to the factors that drive that.
Bob Sasser:
Well, that's a very subtle change in the language, but I will tell you, we factor in -- as always, we factor in the guidance, especially the first quarter when you're looking out across a whole year of guidance, and you don't know what's coming at you, so you're always looking at what -- where the rocks in the road may be. So you factor in what you know and what you could expect, and what possibly could happen, and you throw that against how you feel about the strength of the business and the momentum that you have going into the year and all the values that we know that we have planned, the promotions that we have planned. So I will tell you that, I guess, you could read that, as we are excited about our business. I can tell you that first quarter initiatives are more exciting than probably they've ever been. You've heard me say that before, but there really is an excitement about our business, our Dollar Tree business as we look forward into 2015. It's just the uncertainty out there. So what we've tried to do is sort of -- more than sort of. We'll try to just describe to you all the factors that we consider to go into our guidance, and at the same time, we'll tell you that we are absolutely positioned, dead in the crosshairs of where the value customer, and they're all value customers now, but where the value customers is going, and we're more relevant than ever. I can't tell you that I can -- I don't have any empirical data, but the wind feels a little bit to our -- back in the value sector right now with lower gasoline prices and lower energy prices and lower diesel fuel prices, and there's just a lot of lowers there that tend to help us as we accelerate our momentum going into the year. That having said, we would be remiss if we didn't also point out the uncertainties that we see out there. So our guidance is our guidance. I'd like for you to believe it. I'd like for you to -- we have a -- I've always tried to earn credibility with our guidance and to factor in all that we know the best we can.
Matt Nemer:
We're happy to see the mid single comment in there. And then just secondly, following up on gross margin, if we just isolate the freight-related components, Kevin, how do you think that, that will play out in terms of just the driver shortage versus the gas price benefit and then, I guess, versus any port delay cost this year if we exclude investments in wow brands, et cetera, how does that play out in 2015?
Kevin Wampler:
I think just to give you some direction, so if we think about inbound and outbound rates, and then there's obviously the fuel component, the actual inbound and outbound rates are probably about 80% of the overall cost, with the fuel piece being about 20%. So obviously, as we've talked about rates going up, fuel being a smaller piece, but going down, so realistically, if rates continue as we expect them, we will not be able to offset all of that rate increase with the fuel decrease as we see it right now. So that's why we've said within the guidance, we project that we'll -- there is headwind from freight cost throughout the year.
Operator:
We'll go next to Paul Trussell with Deutsche Bank.
Tiffany Kanaga:
This is Tiffany Kanaga, on for Paul. Would you update us on your long-term store growth potential as a standalone entity and also as a combined one? I know you outlined the thousand stores in Canada, but any additional color would be helpful.
Bob Sasser:
Well, we've always, for years and years, we've said 7,000 Dollar Tree stores, and I think that was probably if we were to update it today, we would say that that's probably on the low side, but 7,000 Dollar Tree stores in the U.S. Our Deal$ brands adds to that. We've never quantified it, but our Deal$ brand is in addition to the 7,000 Dollar Tree stores. And in Canada, 1,000 Dollar Tree Canada stores is -- we feel very good about growing over time to 1,000 stores in Canada. The combined growth, all I can tell you there, so far, since we have not closed on the Family Dollar deal is what's in the public documents out there that you've seen, as well as everyone else, I guess. And Family Dollar said, I think, 15,000 stores is their potential. So if you take the 15 and add the 7 plus, the 1, 23,000 stores, sound like might be the right math on that. By the way, I think the combination of Family Dollar and Dollar Tree is -- I've said it before, it's complementary. One does not trump the other. So we can continue to grow the Dollar Tree brand in addition to growing the Family Dollar brand at the appropriate pace over time.
Operator:
We'll go next to Dan Wewer with Raymond James.
Daniel Wewer:
Following up on your comments on format optimization, do you think that the Family Dollar locations are sufficient, that they could generate the same type of sales and profit productivity as a Dollar Tree, and also, if this will give Dollar Tree an opportunity to start going into smaller markets that historically you sidestepped.
Bob Sasser:
Let me see if I understood the question, but what we've done on format optimization, we've taken the Family Dollar locations and we've run them through our real estate model, as if we were looking for a new Dollar Tree store, and our real estate model then predicts the success, the productivity of that store format. We started with the lowest performing Family Dollar stores, I forget how many hundred, but it was hundreds, and we've run those through our models to come up with the initial number of stores that would benefit, we think, from moving from a Family Dollar brand to the Dollar Tree brand. In other words, the stores would be more productive and more profitable likely because they serve -- they are more focused on the appropriate customer. Some of the Family Dollar Stores that moved into the suburban markets over recent years are in that group. They don't do quite as well in the suburban markets. Dollar Tree does much better in the suburban markets. So that's how we looked at it. We haven't really looked the other way yet because until we close, we won't have access to all of that data on the Family Dollar side to be able to run the Dollar Tree Stores through the Family Dollar data but...
Daniel Wewer:
But it's your thought that the underperforming Family Dollar Stores and suburban locations, Dollar Tree type locations, could generate the Dollar Tree profit metrics?
Bob Sasser:
Yes, that's right. That's exactly right.
Daniel Wewer:
That's great because, I mean, there's a huge difference between the 2. Kevin, quick question for you. You talked about excluding acquisition costs and the guidance. Does that include -- excluding the interest expense related to the acquisition?
Kevin Wampler:
Yes, it is. So you would have seen, for example, in this quarter in the table, the income statement, you saw the -- in the adjustment column, there was $45.8 million of interest-related cost related to the financing that was excluded, so yes.
Operator:
And we'll take our final question today from Dan Binder with Jeffries.
John Gugliuzza:
This is John Gugliuzza, on for Dan. My question is on SG&A. It was flat for the quarter despite the 5.6% comp increase driven higher -- by the higher incentive compensation. So we're a little bit surprised to see that. As you guys look to next year, can you give us any guidance on where you see the comp leverage point, particularly in the fourth quarter?
Kevin Wampler:
Yes, I think one thing I would speak to as it relates to the fourth quarter is the fact that if you look at the quarter we're comparing against last year, last year's comp, a year ago fourth quarter comp was 1.2%. So obviously, we underperformed. Obviously, much of that was weather-driven at that point in time, but it affected the incentive compensation line items. It was a benefit basically to the P&L at the end of the day. This year, we obviously over-performed. So there is a dichotomy between the 2 quarters we're comparing at the end of the day from an SG&A standpoint. So I think that's the biggest driver of why we see that. You would notice that, for the year, we still leveraged SG&A by 40 basis points for the year on our 4.3% comp. So I don't think the leverage point necessarily has changed overall as it relates to SG&A. I think it was much more of a comparability issue year-over-year for that quarter as it relates to incentive-based comp.
John Gugliuzza:
Okay, and then just one more question, another question on gross margin. Just regards to your strategy to invest more on merchandise, we were -- gross margin inched up a little bit this quarter. So I'm just kind of wondering if there's been a little bit of a shift in the strategy or is it just a smaller kind of component of the movement in gross margin now. How should we think about the -- your strategy in investing in merchandise going forward?
Bob Sasser:
Well, that ebbs and flows, but the -- what you saw there was a result of fourth quarter. Fourth quarter always has opportunities to show more value on higher margin products with more of the discretionary product. Our discretionary product grew at a little faster rate than our consumer product in the fourth quarter, for example. So while we drove a terrific comp, we drove more of the comp with discretionary variety products. So that's a good thing. But I wouldn't read anything on to the annual numbers, as we've always had the strategy of as we got better cost or better prices, reinvesting some of that, not taking it straight in the gross margin, but reinvesting it to more value for the customer and that's what you see when you see the consistency of our gross profit over the years. So no change in the strategy. I think what you see in there is just the fourth quarter effort and initiative. Are there any more questions?
Operator:
And that does conclude today's question-and-answer session. At this time, I'd like to turn the conference back to Mr. Randy Guiler for any additional or closing remarks.
Randy Guiler:
Okay, and I just want to remind everyone that the guidance that we're providing for 2015 does not include any share repurchases. And thank you for joining us on today's call and for your continued interest in Dollar Tree. Our next quarterly earnings conference call is scheduled for Thursday, May 21.
Operator:
Again, that does conclude today's presentation. We thank you for your participation.
Operator:
Good day, and welcome to the Dollar Tree third quarter earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Randy Guiler, Vice President, Investor Relations. Please go ahead, sir.
Randy Guiler:
Thank you, Christie. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the third quarter of fiscal 2014.
Our call today will be led by our CEO, Bob Sasser, who will share insights on our third quarter performance and an update on our business initiatives. Kevin Wampler, our CFO, will then provide a more detailed review of our third quarter financial performance and details related to our outlook for the remainder of the year. 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 current report on Form 8-K, quarterly report on Form 10-Q and annual report on Form 10-K, which are on file with the SEC. We have no obligation to update our forward-looking statements, and you should not expect us to do so. On July 28, 2014, Dollar Tree announced that it entered into a definitive merger agreement to acquire Family Dollar Stores. Unless otherwise noted, all margin, net income and earnings comparisons presented today exclude the impact of Family Dollar acquisition-related costs for the third quarter and year-to-date. Acquisition-related costs for the third quarter and year-to-date are included in the adjustments column of the consolidated income statement included in today's earnings release. I would like to inform you that Dollar Tree has filed a Form S-4 registration statement that includes a proxy statement of Family Dollar and prospectus of Dollar Tree regarding the merger. The registration statement has been declared effective by the SEC, and the proxy statement prospectus has been mailed to Family Dollar shareholders. You are urged to read the proxy statement and prospectus because it contains important information about the merger. In addition, Dollar Tree and Family Dollar, and their directors and officers may be deemed to be participating in the solicitation of proxies in favor of the proposed merger. You can find information about the Dollar Tree directors and executive officers in Dollar Tree's most recent proxy statement and about Family Dollar directors and executive officers in Family Dollar's most recent 10-K. You may obtain a copy of these documents through the SEC's website, the Dollar Tree and Family Dollar website, or by requesting a copy from either company's Investor Relations department. The purpose of today's call is to discuss Dollar Tree's performance for its third fiscal quarter. During today's Q&A and in follow-up telephone calls, we will not discuss our impending acquisition of Family Dollar or related matters. At the end of our prepared remarks, we will open the call to your questions related to our third quarter performance. [Operator Instructions] Now I will turn the call over to Bob Sasser, Dollar Tree's Chief Executive Officer.
Bob Sasser:
Thanks, Randy. Good morning, everyone. This morning, we announced Dollar Tree's results for the third quarter 2014. Comp store sales increased 5.9% in the quarter, driven by increases in both traffic and average ticket. This was on top of a 3.1% comp in the third quarter last year and marked our 27th consecutive quarter of positive comp store sales.
Total sales grew 11.2% to more than $2.09 billion. Operating income increased by $29.7 million or 14.5%. And operating margin for the quarter was 11.2%, a 40 basis point improvement from the prior year's third quarter. Net income increased 13.6% to $142.4 million, and adjusted earnings per diluted share increased 19% to $0.69 compared with third quarter 2013 earnings of $0.58 per share. Year-to-date through 3 quarters of 2014, total sales were $6.13 billion. This is an increase of 9.3%. Comp store sales increased 3.9%. Operating income increased by $56.3 million to $678.4 million. Operating margin was 11.1%. Net income was $406.7 million compared with $383.6 million last year. And earnings per diluted share were $1.96, an increase of 13.3% compared with $1.73 per share last year. I'm extremely pleased with our third quarter performance. These results continue to validate that Dollar Tree is part of the solution for millions of consumers as they strive to balance their household budgets. Our strategy to increase the wow factor resonated with customers in the third quarter. Our merchants delivered product that exceeded the customers' expectations. And our stores delivered on our promise of a clean, fun and friendly shopping experience. Our focus continues to be on serving our existing customers better, while taking every opportunity to gain new customers in every store, every day. Our operating margin continues to lead the discount retail sector, while our values are better than ever and our prices, as always, are just $1 per item. Our customers know that at Dollar Tree, yes, you can afford it. Comp store sales were consistent and steady as we move through the quarter. Sales in our home, seasonal and basics division were tightly grouped, and our sales increase was a result of growth in both basic consumables and discretionary product. Top-performing categories included pet supplies, hardware, party, household products and food. Additionally, sales performance in the third quarter was relatively consistent across the country and all 5 zones achieved solid comp store sales increases, with strongest comps in our Southern zone. Key events in third quarter included back-to-school with dominant displays in August including pens and pencils and paper, glue, crayon, scissors. All the basic needs that you have to have to head back to class, and all priced at $1 or less. In September, store teams quickly transitioned the seasonal areas to fall harvest and Halloween products. Virtually overnight, Dollar Tree became Halloween headquarters, with major statements of Halloween dress-up, costume accessories, trick-or-treat buckets, bags and candy. Customers were thrilled with our displays of Halloween decor and party supplies. They responded with their purchases and we were pleased with our sales results. Also in September, we celebrated our 28th anniversary at Dollar Tree and kicked off a 2-month celebration event with the largest selection of bonus buys and wow items ever available to our customers in a short period of time. There were almost 200 different special value items available during the 2-month event. Key categories were home cleaning, snack, beverage, candy and food. High-value private labels and national brands were represented throughout the event. Our offers were compelling and our customers were thrilled. Sales results were excellent. Looking forward, we are well-positioned for increased relevance to our customers, sustained growth and improved profitability. We have many opportunities to continue growing and improving our businesses through opening more stores, increasing the productivity of all stores and further developing our new formats, new markets and new channels as growth vehicles. In the third quarter, we opened 117 new stores and we relocated and expanded 18 existing stores, for a total of 135 projects. Total square footage increased 6.8%. We ended the quarter with a total of 5,282 stores across 48 states and 5 Canadian provinces, and we're on track to achieve our opening plan for the full year, which includes 375 new stores and 75 relocations and expansions, for a total of 450 projects across the U.S. and Canada. As a reminder, square footage for the full year is planned to increase 7% over fiscal 2013. In addition to new stores, we continue to execute our strategy to improve productivity in existing stores. This strategy includes category expansions. Our customers are finding more value as we continue to rationalize and expand assortments in pet supplies, hardware, health care, beauty and eyewear, as well as home and household products. Customers are continuing to see more powerful and more relevant, seasonal and party presentations, enhancing their shopping experience. Our seasonal assortments are creating merchandise energy as our storefronts change with the seasons. At Dollar Tree, we want to own the seasons at the $1 price points. Store associates are working diligently to provide greater customer engagement in our stores, and especially at the front-end, to drive impulse and related items sales. Stores are keenly focused on providing value and a shopping experience that exceeds the expectations of every customer every day. As always, our merchants and store teams are focused on being first of the month-ready, with an increased emphasis on displays of basic, consumable core item, when more customers are shopping for their basic needs. And to satisfy basic needs and to enhance frequency of visit, we continued to expand our frozen and refrigerated category. In the third quarter, we installed freezers and coolers in 133 additional stores. We now offer frozen and refrigerated products in 3,543 stores, with plans to expand this important category to additional stores over time. While this category is lower margin, the product serves the needs of our customer. It is fast returning, more frequently purchased, and the increase in shopping frequency provides the opportunity to drive sales across all categories, including higher-margin discretionary product. In addition to new Dollar Tree stores in the United States, Dollar Tree Canada and Deal$ are key components of our growth strategy. In third quarter, we opened 9 new Dollar Tree Canada stores, ending the quarter with a total of 205 Canadian stores. Leveraging the buying power of Dollar Tree, our merchants are sourcing higher-value product, and our Canadian customers are finding broader, more exciting assortment and better values in the stores. There's an enormous potential for growth in Canada. As we grow and improve, we believe the Canadian market will support up to 1,000 stores. This is in addition to the 7,000 store potential for Dollar Tree in the United States, plus additional growth in our Deal$ brand. Our goal is to be recognized by customers as the leading retailer in Canada at the single price point of $1.25, just as we are in the U.S. at the $1 price point. Our Deal$ format further extends our ability to grow. By lifting the restriction of the $1 price point, we have the opportunity to serve more customers with more categories and increase our overall unit growth potential. Deal$ delivers low prices on everyday essentials, party goods, seasonal and home products. The stores operate using a multiple price point strategy and they have the potential to generate higher store volume with a higher average ticket. We ended the third quarter with a total of 219 Deal$ stores. In addition to Dollar Tree, Dollar Tree Canada and Deal$, 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 more stores. In the third quarter, we launched our world-class local search solution. Local searches are done for a specific and, usually, more immediate reasons. As an example, this functionality will help people find Dollar Tree like never before via local search engines. Dollar Tree Direct also launched a new section in our website in the third quarter that houses all of our crafty and seasonal videos. You'll find more than 25 short videos covering our exciting seasonal merchandise from how to throw a great party on a tight budget to do-it-yourself craft videos. We continue to leverage social media to connect with customers. A few examples include our loyalty program called the Value Seekers Club, which has grown 110% over the past 12 months. Our email database has grown to more than 1.4 million subscribers. And we now have more than 1.3 million fans on Facebook. Social media continues to provide tremendous opportunities to communicate about exciting events and great products, both in our stores and online. We're pleased with the year-over-year growth of both sales and visitors to our Dollar Tree Direct business. Please check us out at dollartree.com. Now I'd like to turn the call over to Kevin who will give you more detail on our financial metrics and share our outlook. Kevin?
Kevin Wampler:
Thanks, Bob. As Bob mentioned, our adjusted third quarter earnings increased 19% to $0.69 per diluted share. We are especially pleased with our 5.9% comp sales performance, which was composed of a 4.7% increase in traffic and a 1.1% increase in average ticket. The comp strength was very broad-based by category across regions and throughout each of the 3 months in the quarter.
Starting with gross profit, our gross profit margin was 34.6% during the third quarter compared with 35% in the prior year's third quarter, a change of 40 basis points. The majority of the decrease was related to freight. Freight cost as a percentage of sales increased as domestic trucking rates were higher, reflecting the effects of the industry-wide driver shortage. Merchandise mix, again, negatively impacted margins. However, as Bob mentioned, we have made strategic decisions to expand assortments, focused on providing greater value to consumers in order to drive traffic and capture share. We continue to be pleased with the results we are seeing. Partially offsetting headwinds were -- from freight and mix were -- partially offsetting headwinds from freight and mix were improved initial markup across many categories and leverage on occupancy cost. A higher IMU reflects continued improvements in sourcing and the flexibility of our merchandise model. Excluding acquisition-related cost, SG&A expenses were 23.4% of sales for the quarter, an 80 basis point improvement compared with 24.2% in the third quarter last year. Payroll-related expenses represented 45 basis points of the improvement due to leverage from the same-store sales increase, reduced store payroll due to improved productivity, lower health care costs and lower workers' compensation expenses. Store operating cost improved 15 basis points due to lower store repair and maintenance expenses. And depreciation expense improved approximately 15 basis points as a percent of sales due to the leverage from the strong 5.9% same-store sales. Adjusted operating income increased $29.7 million compared to the third quarter last year. Adjusted operating margin improved 40 basis points to a third quarter company record of 11.2%. Year-to-date through the third quarter, our operating margin is 11.1%, the same as a year ago, despite continued freight headwinds related to the domestic driver shortages in the trucking industry. The tax rate for the third quarter was 36.6% compared to 36.9% in the third quarter last year. The reduction in the tax rate is due to a favorable adjustment from the completion of the 2013 tax returns. Cash and investments at quarter-end totaled $407.6 million compared with $147.1 million at the end of the fiscal third quarter of 2013. Our consolidated inventory at quarter-end was 5.5% greater than at the same time last year, while selling square footage increased 6.8%. Consolidated inventory per selling square foot actually decreased 1.2%. Our inventory turn increased in the third quarter and we expect continued improvement in inventory turns for the full year. We believe that current inventory levels are appropriate to support scheduled new store openings and our sales initiatives for the remainder of 2014. Capital expenditures were $94.2 million versus $84.5 million in the third quarter last year. For the full year of 2014, we continue to expect consolidated capital expenditures to be in the range of $360 million to $370 million. Capital expenditures are focused on new stores and remodels, including additional fee development stores; the addition of frozen or refrigerated capability to approximately 460 stores; IT system enhancements, including information security; the expansion of our Joliet, Illinois distribution center; and the initial phases of work on our 11th distribution center. We have not yet announced the location of this distribution center, but we anticipate breaking ground in the first quarter of 2015, and having the facility open in Q1 of 2016. Depreciation and amortization totaled $50.9 million versus $48.6 million in the third quarter of 2013, an improvement of approximately 15 basis points as a percent of sales. We continue to expect depreciation expense to be in the range of $200 million to $210 million for the year.
Our guidance takes into account our actual performance for the first 3 quarters of 2014, as well as our visibility and forecast into the remainder of the year. Our guidance includes the following assumptions:
We anticipate that freight cost will continue to be a headwind to gross margin, primarily as a result of driver shortages. Product margin remained under pressure based on strategic decisions to invest in certain product categories, driving traffic and market share increase. This year, there's 1 additional selling day between Thanksgiving and Christmas, which returns us to a more normal pattern than in 2013.
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 38.1% for the fourth quarter and 37.8% for the full year. We continue to expect weighted average diluted share counts to be 206.6 million for the fourth quarter and 206.9 million shares for the full year. Additionally, we have not included any acquisition-related cost on our fourth quarter guidance as we cannot currently forecast the timing of when these costs will be incurred. Our outlook for the fourth quarter is consistent with our original forecast as we entered into the back half of this year. For the fourth quarter of 2014, we are forecasting sales in the range of $2.39 billion to $2.46 billion based on low to low mid-single digit comparable store sales increase at 7% square footage growth. We anticipate the gross profit margin will continue to be challenged by year-over-year freight increases, as well as our commitment to provide greater value to our consumers in this challenging macro environment. Diluted earnings per share, excluding acquisition costs, are expected to be in the range of $1.07 to $1.14, an increase of 5% to 12% compared with the fourth quarter of last year. For the full fiscal year of 2014, we are now forecasting sales in the range of $8.52 billion to $8.58 billion based on a low to low mid-single-digit increase in same-store sales, and 7% square footage growth. Diluted earnings per share are now expected to be in the range of $2.97 to $3.04, this represents an increase of 9% to 12% over 2013 earnings per share of $2.76. I'll now turn the call back over to Bob.
Bob Sasser:
Thank you, Kevin. As a reminder, we will not answer questions related to or provide more detailed insight on the impending acquisition of Family Dollar. However, before I continue, I want to make a few comments.
On November 7, Dollar Tree certified substantial compliance with the second request of the Federal Trade Commission. The current process with the FTC is what we expected many months ago. This is a large merger involving many stores, and it simply takes time for the FTC to analyze the documents and data. We commend and very much appreciate the hard work and diligence of the FTC staff. These are 2 different and complementary strategies. Our single-price point Dollar Tree stores sell very different products to a different customer base than the multi-priced point Family Dollar Stores. Our merchandise overlap is small, and product in Dollar Tree stores is priced at one price, nationally. Our concepts, merchandise and customers are very different. As a result, we are confident and expect the number of any divestitures will be less than the original divestiture commitment we made in the July merger agreement. This will not materially affect our business or results of operation. To provide better clarity to the Family Dollar shareholders on the FTC process, the shareholders meeting to vote on the merger has been reset for December 23. I'm pleased with the work that has been done on integration planning, and we're more excited than ever about the potential of the combined companies. We're continuing to work to close the transaction as soon as possible. As a reminder, this combination creates a large and leading discount retailer in the most attractive sector in North American retail. We're combining complementary business models across fixed and multi-price point strategies, targeting a broader range of customers and geographies. We see significant and immediate opportunities for operational improvement, and near-term opportunities for synergies, all of which create opportunities for enhanced financial performance, improved growth prospects and higher returns for our shareholders. We look forward to successfully concluding the acquisition and welcoming the Family Dollar associates to our team. I'm extremely pleased with our third quarter and year-to-date performance, and I'm excited about Dollar Tree's future. In fact, this year, we're on target to exceed 1 billion transactions for the first time in our customer -- company history. Initiatives to drive comp store sales are finding enthusiastic acceptance with a consumer that continues to be under pressure to make ends meet. Our in-stock on basics is the best ever. Customers are finding more of the things they need and the things they want on each trip. Stores are first of the month-ready. When the customer has money in their pocket and they're ready to shop, we want to be ready with the product. We think of the first of the month as 12 additional holidays and we prepare them as such. The expansion of wow items is providing customers with bigger sizes, bonus buys and bigger savings throughout the store. Our category expansions in pet supplies, hardware, household supplies, food, electronics and party are driving solid sales increases. We continue to roll out frozen and refrigerated product to drive traffic to more stores. Our front entrances are well-stocked with ever-changing assortments of seasonal products that add excitement and merchandise energy to the shopping experience. Our stores are full, fun and friendly, with more customer engagement as we strive for the same experience for every customer in every store, every day. This was a terrific quarter. Total sales were 11.2% and we exceeded $2 billion in third quarter sales for the first time in company history. Our comp store sales increase of 5.9% was our best quarterly comp since fourth quarter of 2011. Importantly, sales were the result of increases in both traffic and average ticket. Our customers are shopping more frequently and buying more on each trip. Sales came from across the store, solid comp increases in both consumables and discretionary products. Each of the 3 months in the quarter was solid single digit comp sales positive and adjusted earnings per share grew 19% to $0.69 per diluted share. At Dollar Tree, our focus is on growing operating profit using a strategic approach to driving sales, managing gross margin and controlling expenses. In the third quarter, excluding acquisition-related costs, we achieved a third quarter company record at 11.2% operating margin, up 40 basis points from the prior year. We are a large and growing company with multiple platforms and room for growth. In third quarter, we opened 117 new stores, expanded and relocated 18 stores, and ended the quarter with 5,282 stores and square footage growth of 6.8%. The Dollar Tree brand is a benchmark of value for our customers and there's great opportunity to grow and expand Dollar Tree in the U.S. through more stores and more productive stores. We're building, expanding and improving the Dollar Tree Canada brand. The Deal$ brand is serving more customers with increased value on even more categories. And Dollar Tree Direct continues to broaden its reach to customers throughout North America. During the third quarter, Dollar Tree celebrated its 28th anniversary. Through those years, we've grown steadily, built solid infrastructure, evolved from small stores to larger stores with broad assortments, and reinvented ourselves continually. Yet we've remained true to our original concept, everything is still $1 at Dollar Tree and everything is a value. As I look to the future, I see a continuation of exciting opportunities. Our balance sheet is strong. The Dollar Tree business model is powerful, flexible and more relevant than ever, providing extreme value to customers while recording record levels of earnings. This has been tested by time and validated by history. We remain committed to a concept that customers love and we're positioned for continued profitable growth for many years ahead. We have a vision of where we want to go and the ability to get there with infrastructure capital, and most importantly, a talented management team that has a long history of retail success. It's a great time to be Dollar Tree. Our inventories are clean and fresh. The shelves are full of the right products for Thanksgiving and the holiday season. And our values have never been better. Christy, we're now ready for questions about our third quarter.
Operator:
[Operator Instructions] We'll take our first question from Dan Wewer from RBC Capital Markets.
Daniel Wewer:
Well, actually, I'm still with Raymond James, so. So at the end of your comments, you noted that Dollar Tree is a very different concept. On every performance metric, Dollar Tree is widening its advantages vis-à-vis Family Dollar, I guess, Dollar General for that matter. And I thought you did a great job of listing the reasons why you said, "It's a great time to be Dollar Tree." So with that in mind, can you remind me as to what Dollar Tree can do to Family Dollar to turn around its performance? That's going to represent 55% of the other revenues of the combined organization.
Bob Sasser:
As we stated in our prepared remarks, we're not taking questions related to our acquisition of Family Dollar. The Family Dollar shareholder vote is scheduled for December 23. We're eager to add the Family Dollar name to our portfolio, but I can't take questions about it. I will tell you that we're excited about our business at Dollar Tree. Third quarter was a terrific result, and we beat on every metric. Our strategy is working. Customers really are finding us as a way of balancing their budget. They know that they can find things they need and the things they want. And you can come to Dollar Tree and you can get what you want, things that you need, and it's a nice shopping experience. Our customers described it as a fun shopping experience. They always find something that they didn't expect to find and always at great value. So we're different. Everything's $1 at Dollar Tree, has been now for 28 years. No one else can say they have the same price as 28 years ago. We're very proud of that. We're very proud of the brand image that we've built with our customers. We're very proud of the execution, especially in third quarter, that we just finished.
Daniel Wewer:
Yes, I totally agree with everything you just said. Let me ask the question this way, maybe Kevin will let you answer it this way. Do you think that the performance advantage of Dollar Tree vis-à-vis the other 2 concepts just reflects it's a superior concept? Or do you think it's execution that's accounted for Dollar Tree's widening performance gap?
Kevin Wampler:
I think as we think about it, you've heard us say before, we focus on our business. We focus on what we can control, and that's the way we've always thought about our business. Our dollar -- the Dollar price point is a key differentiator at the end of the day. Customer loves it. We focus on the customer. Again, as we talk about our stores, it's about a fun, friendly shopping environment. Associates that are friendly and greet the customer. A lot of our store people know the folks that shop in their stores on a first name basis that are their regular customers. So I think there's a lot of that, that goes into it. But again, at the end of the day, it is our belief to just focus on what we can control and then execute to it.
Operator:
We'll take our next question from Scot Ciccarelli with RBC Capital Markets.
Scot Ciccarelli:
I was thinking Dan replaced me for a second there. Have you guys seen anything that creates concerns for the fourth quarter sales performance? And the reason I'm asking is, obviously, third quarter results were very good. You're actually up against a pretty darn easy comparison in the fourth quarter. So I guess I'm little surprised the comp guidance is low single-digits, especially with gas prices coming down, which I would think would be a nice incremental positive for you guys.
Kevin Wampler:
Well, I think as we think about the guidance, just big picture, Scott. I know you folks like to look at these 2-year stacks and things like that, and the 2-year stack might suggest that we should be doing a 7 comp in the fourth quarter, which, obviously, would be a tall task for anybody at the end of the day. But as we look at the guidance, we expect -- we're going to do every -- we're going to ring the register every time we can during the quarter, and we think we've got a good merchandise plan. The stores look great. I hope you all get the -- have a chance to get out and get in our stores and see our holiday merchandise as we move through the season. But I think in the guidance standpoint, we still expect headwinds from freight. It's going to continue to be there. We expect -- we would expect a little leverage on SG&A. I think the other thing that -- and the big picture I want everybody to realize is that we have not changed our guidance from what we gave originally in February, other than to adjust for the actual results and the acquisition costs. What we got to remember is the February guidance did not contemplate the level of freight headwinds that we've faced during this year. So we've been able to offset that by driving sales and controlling cost and creating leverage on expenses. So I mean, I think that's been a big part of this. And I think it really kind of points back to what you heard Bob and I say before, that is, if we can see it coming, we can react accordingly. We can make plans within the business to work to mitigate some of these increases that we may see in certain line items. So I think there's a lot of moving pieces, but I think, really, given some of the cost pressures we've seen on freight, I really feel pretty good about our performance this year, but also as we look at guidance. And at the end of the day, if we're able -- the guidance is there, we're always going to look to outperform if we can. But obviously, if you ask the people in Buffalo right now, you don't know what the weather's going to be, and so there's a lot of unknowns as we continue through the quarter.
Scot Ciccarelli:
Kevin, a lot of those issues though are really on the cost side as opposed to the top line. Were there -- are you guys impacted by port disruptions or anything else? Are you off to a softer start? Or is this just kind of general conservatism because you never know when it comes to the holidays?
Bob Sasser:
Yes, we're excited about fourth quarter. I'll tell you that we've got terrific plans, we got the best merchandise plans ever. So we're excited about it. And frankly, we -- our momentum continues in the fourth quarter. It's just begun. We were only a couple of weeks into the quarter, so hard to declare victory, but I feel really good about fourth quarter. Kevin shared with you how we plan our guidance. We try to tell you -- we try to include everything we know about our business and our guidance, and then we need -- we always consider things we don't know that might happen, so our guidance is pretty good. I think you can count on it to give you the best thought at it. He's right, though because we've beat -- through third quarter, we've beat and we've added that to our guidance that we gave in February and that was before we knew the pressures that we were going to have on our freight. So we've overcome the pressures that we had from freight and still beat, and we have raised our guidance here because of the beat. So I think that's extra special, frankly, because it speaks to the execution of the model. It speaks to the management team's ability to respond by driving sales, by managing cost, by managing flow of product to the stores. And it really was a terrific quarter. Our forecast for fourth quarter is our best forecast with the things we know. It has no bearing on how excited we are. As we enter it, the excitement for fourth quarter is huge. Our merchandise plans, I'll just share with you, I'll take a little more of your time, but we have terrific new product in our fourth quarter. We've got cellphone and tablet accessories for $1, all for $1, trend right, fashion right, things you find in other retailers for much more than $1. We've got -- by the way, with the cold weather, our winter wear is the best it's ever been. We've got the Snugadoo socks for the ladies and the gloves and the hats and the scarf, and they're all just $1. So we're excited about the winter wear that we have. Our catering assortment, I don't know if you follow that part of the business, all the catering supplies that we sell, we've expanded that assortment for holiday. It's the right time. It's the right product. We've got the plated utensils. We've got the plated -- the silver-plated matching plates, we've got the plated wine and champagne glasses and for all your parties for the holidays, and we -- it's just going to be terrific merchandise in our stores. I could go on and on about the new items and the new product that our merchandise team is bringing to bear, but we are excited about our holiday and our Christmas sale. For that reason, it's all about merchandise, it's all about stores and it's all about the customers.
Operator:
We'll go next to Michael Lasser with UBS.
Michael Lasser:
I'm interested in the merchandise margin and how the underlying margin flow this quarter being better than it was last quarter. Was it that you didn't see as much of a mix shift pressure to some of the more value-oriented items that you added or was there some other offset that drove what seemed like an improvement there?
Kevin Wampler:
Michael, as we looked at it, I think part of it is a little bit of mix in the sense of the discretionary goods. We get a little bit of a benefit in the sense Halloween falls in the third quarter. It's a large discretionary category for us as we move through the quarter. I think, again, it's always a balance, at the end of the day. Providing great value. Doesn't mean we had any less of the national brands. You heard us talk about the fact that we had the best anniversary sale ever, with 200 items, bonus buy items and with just absolutely fantastic results for us. So we look at those things. So again, it's always about a balancing act. The discretionary product, very, very good, as was the consumable product, but we just didn't see quite the same effect that we saw in the second quarter. But again, it's always going to be that, a little give, a little take, and that's the way we've always looked at our business.
Michael Lasser:
And then on the freight side, obviously, the labor shortage still seems to be an issue, but are you seeing some relief from lower fuel prices? And do you think that, that will be an offset over time?
Kevin Wampler:
Well -- it has a potential to be helpful, obviously. So talk about a couple of different metrics here. For the third quarter, the average diesel price was down $0.13 to last year. And compared to how we had forecasted it in our guidance, there's really only about $0.02 difference, so it's really not a big differential there. Bigger picture as we think about diesel, the metric I pointed to in the past is that if diesel was down $1 for the full fiscal year, it would have -- it would be a benefit of about $0.10 to earnings to us. There should be a little bit of help in Q4 because the differential between a year ago and where we're at today will be a little bit pronounced, more pronounced than the $0.13 we saw in Q3, but I have to move quite a bit to have a significant effect on the overall cost because the fuel is just one component of the overall trucking rate that we end up paying.
Michael Lasser:
Yes, that's very helpful. Let me just add one last one, longer term in nature. You have $1.25 price points in Canada, and maybe you could talk about what your learnings are from that and how they are applicable to your model in the U.S. and the flexibility you would have with your price points in your core Dollar Tree business over time.
Bob Sasser:
The $1.25 in Canada, that's Canadian dollars. So on a conversion rate, the Canadian dollar is around $0.89, something like that, $0.87 to $0.89. So we charge $1.25 in Canada. First of all, that was the price when we bought Dollar Giant, which was a company we bought, so we left that the same. But we left the $1.25 price because as the value of the product that we're selling in Canada, as it relates to the U.S. product, we're selling a lot of the same product. So in Canada, with the conversion, you actually need $1.25 or need higher than $1 to make the margins work. Also, the costs or the cost of doing business in Canada are a little higher. So we have a lot of the things in Canada that we sell in the U.S. We add to that assortment of product that we source in Canada or that we source especially for Canada for the $1.25 product. And again, we're having success, building the brand, we're investing in the business, we're investing in new stores, in infrastructure there and have been, and we'll continue to. We're pleased with where we're going with Canada. I wouldn't expect us to raise prices at Dollar Tree to $1.25 in the long view. I would have even said the near-term, but the long-term. And at the -- in the U.S., everything's $1 and Dollar Tree resonates. We've built that brand. We've proven that we can run that over time. Our margins are better, our values are better. Everything's $1 at Dollar Tree, so we don't have any intentions of raising our price in the U.S. to $1.25.
Operator:
We'll go next to Paul Trussell with Deutsche Bank.
Paul Trussell:
Just want to touch base on Canada and Deal$ stores, you certainly alluded to them earlier. But if you can just give a little bit more detail on the performance of those 2 smaller segments?
Bob Sasser:
Yes, I'll try to give you some color on the Deal$ and the Canadian stores. We had nice comps in the quarter in our Deal$, I'm just going to talk about Deal$ first. Strongest comps at Deal$. We're in the Southeast, followed by the Midwest. Our average transaction was up in the quarter at Deal$ stores, so I was pleased with that. Comps by division, again, were strongest. And our general merchandise comps were the strongest, followed by our seasonal and then our basic. We had 4 big merchandising events for the quarter in Deal$ versus the 3 that I spoke to at Dollar Tree. At Deal$, we had the back-to-school event, Halloween event, our anniversary event, and also, early opening of Toyland, because we have a little bit different toy business in our Deal$ stores. Sticking to those just a little bit, we had a strong back-to-school season in our core stationary departments and, really, an exceptional year in selling backpack as we continue to surprise our customers with great values on that type of product. Our stores, again, made a quick transition from back-to-school into our fall and harvest, and our anniversary sale. Our Halloween business, our candy sales were strong for the candy season. We had a particularly strong seasonal sales in that category. We featured more brands than last year, and the consumer reacted enthusiastically to that expanded offering. In the anniversary sale event, it featured many bonus branded value packs. Some examples were Dawn value pack, and Softsoap, and Lysol, and Lysol Tub and Tile bonus packs, and we had General Mills bonus cereal sizes, and a pretty broad array of bonus buys and wow items throughout the period of time. All of this was prominently featured, supported by our circular events. And additionally, we're able to support these products and the manufacturers' FSIs [ph] in our stores, always trying to create more value opportunities for our customers. And lastly, our Toyland opened earlier this year, so we opened up for that in the fourth quarter, featuring more favorites from the name brands, Mattel and Hasbro and other major toy manufacturers. We still are focused on this great assortment of $5 toys that we continually offer each year, but this year's assortment is even larger. The -- we continue to grow our GM and our seasonal departments at a faster rate than our consumables, but we're focused on offering more products and a broader mix of everyday items to help make our customers' shopping trips more efficient. Talking about the mix, the consumables was over 60% of the mix at Deal$ for the quarter. That's been about what it's been running. Our average ticket at Deal$ for the quarter was $9.73, that's higher than our Dollar Tree average ticket as you might expect. We're selling more and more of our items above $1 at our Deal$ stores. The average ticket on items greater than $1 was $14.49, so the idea of driving a higher average sale for our customers, offering more value on more products, seems to be getting traction. 50-some-percent of all transaction had items greater than $1, and greater than $1 items represented 50% of our Deal$ total sales. So a good quarter in Deal$, really executing on the brand. And we can do better and we can continue to improve and we're learning all the time on the new concept. We're following our customers closely and trying to give them more of the things that they want. In Canada, our comp sales were driven by both average ticket and traffic. Top categories, top departments in Canada were our food department, followed by snacks and beverage, and then our floral department. I'm speaking in terms of comp sales increases. Our store count for the quarter, there were 205 stores in Canada, 9 new stores opened in Q3. 27 new stores have opened year-to-date. We've run more and more promotions throughout the quarter in Canada. We had a compare and save program, with 6 compare and save events, almost 50 items. They included special buys of name brands and private label merchandise. In conjunction with these compare and save programs, we had a special signing. We changed these items throughout the quarter. We continue to refine our seasonal business in Canada and we see an opportunity to own the seasonal business at the $1.25 CAD price point just as we do in the U.S. at $1.
Paul Trussell:
I appreciate it. Just circling back quickly to margins. Kevin, you mentioned in your 10-Q this morning that payroll leveraged by about 45 basis points, operating cost leveraged by 15 bps. Is there anything, as we look forward into 4Q, timing-wise that you think might alter the landscape there? And then in gross margins, did you or could you quantify the actual impact of freight in merchandise mix and basis points, please?
Kevin Wampler:
Yes, so your first question really relates to SG&A, and we had terrific results as it relates to SG&A in the third quarter, with about 80 basis points of leverage, which is probably even a little more than we might've expected. And as I've said, if you go back and you look at the first quarter on a 2 comp, we got 40 basis points of leverage in SG&A, and I said it was probably maybe more than we would expect on a normal basis. So there's always gives and takes at the end of the day. We did have, as you said, store payroll. We leveraged that. When you do a 6 comp and you're not planning for a 6 comp necessarily right out of the box, you will definitely tend to gain a little momentum there. We talked about health care costs being one of the benefit this year. If you remember, a year ago at this time, we were actually talking about health care costs being up. As a reminder, we're self-insured basically. So last year, we had more large unusual claims than normal. This year, while we had some, they haven't been to the same extent, so you get a little bit of dichotomy there year-over-year. So I think as we go -- so we probably got a little bit more leverage in the third quarter than maybe I would've even expected. And so, obviously, the guidance doesn't plan it to that extent going forward, not surprisingly. On the gross margin side, as far as the freight, I mean, the freight was really the majority of the change, basically. So the 40 basis point decrease was pretty much the majority of that was freight. There were also, as we said, some other pluses and minuses. Mix was a little bit negative, IMU a little bit positive, and a little bit of occupancy benefit leverage, so freight was really the driver of the decrease.
Operator:
We'll go next to Matt Nemer with Wells Fargo Securities.
Matt Nemer:
Your S4 [ph] had some planning assumptions for 2015 and 2016, which included an acceleration in new store growth and an improvement in gross margin. I realize that, that wasn't guidance, but I'm wondering if you could talk to the thought process behind those assumptions.
Kevin Wampler:
Yes, Matt, I mean I think you're exactly right, they're not guidance. We have not obviously given guidance to 2015 or thereafter at this point in time. Those are based upon certain plans. But again, I don't look to them as guidance. We'll obviously give you some guidance for 2015 in about 3 months from now and I think we'll be able to speak in more terms then.
Matt Nemer:
Okay. And then November was, I think, was the weakest month last year in the fourth quarter. Is it fair to assume that you're running stronger than the Q3 comp so far this quarter? Is that a reasonable assumption?
Bob Sasser:
Well, I think November was affected by a calendar shift last year, Thanksgiving shift. So last year was one of those bad calendar years, then by the time you get to the end, it all sort of comes out washed. But I wouldn't look at the trend versus November as being relevant, because the calendar shift this year is much more normalized. I think we have 1 more day between -- in December between Thanksgiving and Christmas that's in December.
Matt Nemer:
Okay, and then just lastly, any thoughts on the freezer cooler rollout over the next 12 months? Will it accelerate, decelerate, about the same?
Kevin Wampler:
I think this year, as we said 460 freezer cooler projects, installs. A larger portion of the installs are going into new stores than they were a few years ago. As a reminder, the things that limit us from adding freezers and coolers to a store could be store size. If it's just not -- if it's not bigger than 8,000 square feet, it's hard for us to have the room to do a good job with our freezers and coolers. In some instances, we're restricted from having freezers and coolers by other retailers in the shopping center where we're at. And then we typically have a volume -- sales volume hurdle that we apply as well within the mix. So we'd love to add the freezers and coolers. As we said, it drives traffic. And as we've said historically, we tend to see a 5% to 10% lift on the store, but that's not just in the consumable side, it's across all categories. So it's been a very good driver of sales on an overall basis and frequency of trips by our consumers, so it will be -- continue to be an important part of how we look to go forward.
Operator:
And we’ll take our last question from Meredith Adler with Barclays.
Meredith Adler:
A lot of my questions have been asked, but I'd like to just talk to you a little bit about real estate. And when you talked about your CapEx, you reiterated the fact that you're spending money on -- oh my God, why did my mind just go blank? -- fee development. And I'm assuming that the fee development is for standalone stores or stores that you're building yourself, that's what it means. Is there some kind of a shift, even a modest shift, in the real estate for the Dollar Tree stores? Or does that spending tie to Canada or Deal$?
Kevin Wampler:
I think fee development is part of our overall growth strategy, and we like fee development from the standpoint that, sometimes, within a retail node, there's just not in-line space available. And sometimes, we can find a parcel of land that's in good location, gives us a lot of exposure to the traffic, the retail traffic, and it allows us to build a box that we really like, the 10,000 square-foot box. It lays out our linears really well for -- and our adjacencies for our merchandising, and it really allows us to put our best foot forward. The other thing, because we're -- we control a piece of land, we obviously are not restricted from having freezers and coolers, so we can have a nice cooler -- freezer and cooler presentation. And what we've seen over the portfolio that we've built to this point, which is still small -- very small subset of the total, is that they performed very well from a sales perspective. We really like what we've been able to do there. So they do continue to be a part of the way we look at our real estate strategy. Again, it's more capital to do that. But in this case, when we have the capital, it's just a nice way to go. And it obviously allows us to continue to grow at the rate that we'd like to grow, which is that 7% square footage growth here or a little more. So I think that's the way we think about it, Meredith.
Meredith Adler:
And you did mention that when you have a standalone store, it's in a node, retail node, where there is a lot of other retailers. Do you think that the experience with fee development stores allows you more sites to open up? Are you restricted kind of the way you have been by the number of heavily trafficked shopping centers?
Kevin Wampler:
Yes, I think it's just another avenue of growth. It's another arrow in the quiver, so to speak, of the way to open stores. When you're opening, you're doing 450 projects a year. In-line space is not always available where you're looking at it, where you're looking to grow, where we don't have stores as the real estate team works through the optimization plans of looking at where we have opportunities to open stores. So it's becoming an important aspect, the way we look at it. And we said, what we really like is the fact that we got a really, really good looking store that, to this point, have performed above average from a sales per square foot and a pro forma basis. So that tells us that we're doing something right.
Meredith Adler:
But you're not going to up your 7,000 target?
Kevin Wampler:
We haven't at this point in time. I think it's there to be looked at. It's something that we think about. We haven't updated that number in probably ...
Bob Sasser:
Ever. Meredith, we've been saying that for 15 years, I guess. It's probably time to -- we were just talking about that, it's probably time to go back and revisit that because the world has changed and there's -- we changed our stores, we've changed the way we go to market. We serve more customers now. And the 7,000 stores was Dollar Tree stores. Our Canadian stores now, we -- that's another -- that's 1,000 store potential, so that brings us to 8,000 stores. And then the Deal$ stores increases that number. But it's probably time to go back and do some work on that. It's going to end up being -- it would be more potential than less potential, though. I wouldn't be able to quantify that yet, but it is probably time to revisit that number. I don't know how many years we've been saying that, but it's been a long time.
Operator:
That does conclude our question-and-answer session today. I would now like to turn the call back over to Mr. Randy Guiler for any additional or closing remarks.
Randy Guiler:
Thank you for joining us for today's call and especially for your continued interest in Dollar Tree. Our next earnings conference call is scheduled for Wednesday, February 25, 2015. Have a great day.
Operator:
That does conclude today's conference. Thank you for your participation.
Operator:
Good day, and welcome to the Dollar Tree Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Randy Guiler. Please go ahead.
Randy Guiler:
Thank you, Marquita. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the second quarter of fiscal 2014.
Our call today will be led by our Chief Executive Officer, Bob Sasser, who will share insights on our second quarter performance and an update on our business initiatives. Kevin Wampler, our Chief Financial Officer, will then provide a more detailed review of the second quarter financial performance and details related to our outlook for the remainder of 2014. Before we begin, I would like to remind everyone that various remarks that will be made about future expectations, plans and prospects for the company constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors included in our most recent press release, most recent current report on Form 8-K, quarterly report on Form 10-Q and annual report on Form 10-K, which are on file with the SEC. We have no obligation to update our forward-looking statements and you should not expect us to do so. On July 28, 2014, Dollar Tree announced it had entered into a definitive merger agreement to acquire Family Dollar Stores. The transaction is expected to close by early 2015. In the second quarter 2014, Dollar Tree incurred approximately $7.5 million in acquisition-related costs. Unless otherwise noted, all margin, net income and earnings comparisons presented today exclude the impact of the Family Dollar acquisition-related costs for the second quarter and year-to-date. The purpose of this call today is to discuss Dollar Tree's earnings for its second fiscal quarter. As mentioned, Dollar Tree and Family Dollar have a definitive merger agreement. We are continuing to work on the proposed transaction. You have likely seen Dollar General's public letter from yesterday and Family Dollar's response this morning. Bob will have a very brief statement on that, but we want to focus on Dollar Tree's earnings this morning and we do not intend to make any further comment at this time, neither in the Q&A session following our prepared remarks nor in follow-up calls. Thank you in advance for respecting our position. [Operator Instructions] Now I will turn the call over to Bob Sasser, Dollar Tree's Chief Executive Officer.
Bob Sasser:
Thanks, Randy, and good morning, everyone. This morning, we announced Dollar Tree's results for the second quarter 2014. Comp store sales on a constant currency basis increased 4.5% in the quarter, driven by both increases in traffic and average ticket. Adjusted for the impact of Canadian currency fluctuations, the comparable store sales increase was 4.4%. This was on top of a 3.7% comp in the second quarter last year and a 4.5% comp the year before.
Total sales grew 9.5% to just over $2.03 billion. Operating income increased by $11.2 million, or 5.6%, and operating margin for the quarter was 10.5%. Net income, excluding acquisition costs, increased to $126.1 million. And adjusted earnings per share increased 8.9% to $0.61 compared with second quarter 2013 earnings of $0.56 per share. For the first half of 2014, compared to the prior year, total sales were $4.03 billion, an increase of 8.4% compared to the first half of 2013 and comp store sales increased 3.1% for the half. Earnings per share were $1.28, an increase of 11.3% compared with $1.15 per share in the first half last year. Operating income increased by $26.6 million to $212.5 million. Operating margin was 11.0%. And net income rose $6.1 million to $264.3 million. I'm very pleased with second quarter performance. With customers under continued pressure, our plan at Dollar Tree is to be a part of the solution to help them balance their budgets by offering higher values on more of the things they need every day and higher values on things they want. We intend to serve our existing customers better while taking every opportunity to claim new customers and gain market share as we demonstrate that Dollar Tree is a convenient and fun place to shop. At Dollar Tree, yes, you can afford it. Our merchants continue to deliver products that exceed customers' expectations. Our values are higher than ever, and our price is always $1 in every Dollar Tree store every day. Our sales initiatives are producing results. Sales growth in the second quarter was a result of strong performance across the store in both our basic consumable and discretionary products. Top-performing categories included pet supplies, hardware, household products, food, electronics and party. Sales strengthened throughout the quarter with our strongest comps in period 6, July, and the momentum continues. We're pleased with the initial sales trends we've seen in the third quarter. Performance in the second quarter was relatively consistent across the country and all zones achieved positive comp store sales. The highest comps were in our Southern zones. Looking forward, we're positioned for continued relevance to the customer, sustained growth and increased profitability. We have room to grow and the ability to grow in many different ways. We plan to continue growth by opening more stores, by increasing the productivity of all stores and by developing new formats, new markets and new channels as growth vehicles. During the second quarter we opened 90 new stores and we relocated and expanded 20 existing stores for a total of 110 projects. Total square footage increased 6.8%. We ended the quarter with 5,166 stores. While our opening cadence is a bit later this year, we're on track to achieve our opening plan for the full year, which includes 375 new stores and 75 relocations and expansions for a total of 450 projects across the U.S. and Canada. As a reminder, square footage for the full year is planned to increase 7% over fiscal 2013. In addition to opening more stores, we continue to execute our strategy to increase productivity in all stores. As discussed in prior quarters, our sales and productivity initiatives include category expansions. Our customers are finding more value as we continue to rationalize and expand assortments in pet supplies, hardware, health, beauty and eyewear, as well as home and household products. Across the chain, customers are seeing more powerful seasonal and party presentations that create excitement and a fun shopping experience. Our seasonal assortments are creating merchandise energy with our storefronts changing with the seasons. We want to own the seasons at the $1 price point. Store associates are working to provide more effective customer engagement throughout the store and especially at the front end to drive impulse and related item sales through cross-merchandising and suggestive selling. Our stores are keenly focused on providing value and a shopping experience that exceeds the expectations of every customer in every store every day. Merchants and stores continue to focus on being first-of-the-month ready with an increased emphasis on not just full, but chunky displays of basic consumable core items at the first of the month when more customers are shopping for their basic needs. We've reintroduced our See What $20 Buys, along with our Stretch Your Dollar campaigns through in-store promotions, signing and digital media and we're pleased with the consumer response. It's ripe for the times. And to satisfy basic needs and to drive increased shopping frequency, we continue to expand our frozen and refrigerated category. In the second quarter, we installed freezers and coolers in 141 additional stores. We now offer frozen and refrigerated product in 3,410 stores with plans to continue growing. While this category is lower margin, the product serves the needs of our customer. It's faster-turning, more frequently purchased and the increase in shopping frequency provides the opportunity to drive sales across all categories, including higher-margin discretionary product. In addition to our Dollar Tree stores, a key component of our growth strategy is the continued expansion of our portfolio of brands including Deal$ and Dollar Tree Canada. Our Deal$ brand extends our ability to serve more customers with more categories and increases our overall unit growth potential. Deal$ stores deliver low prices on everyday essentials, party goods, seasonal and home product. The stores operate using a multiple price point strategy. They offer a higher consumable mix than our Dollar Tree stores and they produce a higher average ticket. By lifting the restriction of the $1 price point at Deal$, we're able to serve more customers with more products at value prices every day. We ended the second quarter with a total of 216 Deal$ stores. Our Dollar Tree Canada brand expansion continues. We opened 7 new Dollar Tree Canada stores, ending the quarter with 196 Canadian stores and we're on pace to meet our expansion plans for the year. Leveraging the buying power of Dollar Tree, our merchants are sourcing higher-value product and our Canadian customers are finding broader, more exciting assortments and better values in the stores. We continue to see enormous potential for growth in Canada. As we grow and improve, we believe the Canadian market will support up to 1,000 stores. This is in addition to the 7,000-store potential for Dollar Tree in the United States, plus additional growth in our Deal$ brand. Our goal is to be recognized by customers as the leading retailer in Canada at the single price point of $1.25, just as we are in the U.S. at the $1 price point. In addition to Dollar Tree, Deal$ and Dollar Tree Canada, our online business at Dollar Tree Direct is growing in size and performance. Dollar Tree Direct provides an opportunity to broaden our customer base, drive incremental sales, expand brand awareness and attract more customers into our stores. In the second quarter, we launched a newly created section on our website called Xtreme Values & New Arrivals. This provides online customers the opportunity to efficiently shop for amazing bonus buys, fantastic deals on manufacturers' closeouts and exciting new arrivals. We continue to see growth in customer outreach through social media. A few examples include our loyalty club, the Value Seekers Club, which has grown 120% over the past 12 months. Our email database has grown more than 130% over the past year to more than 1.3 million subscribers and we now have more than 1.2 million followers on Facebook. Social media provides a tremendous opportunity to communicate with our customers about exciting events and great products, both in our stores and online. Lastly, as always, our practice has been to build infrastructure to support growth ahead of the need. Earlier this year, we broke ground on a 250,000-square foot expansion of our Joliet distribution center. The expansion will bring the total size of the facility to 1,450,000 square feet and will include a second sorter to the existing material handling system to enhance capacity and efficiency. The project is on schedule for completion by year end. Before turning the call over to Kevin, who will give you more detail on our financial metrics and provide guidance, I will comment very briefly on Family Dollar. As you know, we have a definitive agreement with Family Dollar and we are committed to the transaction. We believe that we are offering Family Dollar shareholders compelling, immediate and certain value for their investment and the opportunity to participate in the upside potential of the merger. We will, of course, be watching these new developments closely. We look forward to completing our transaction as soon as possible. With that, I will turn the call over to Kevin.
Kevin Wampler:
Thanks, Bob. As Bob mentioned, our adjusted earnings per diluted share increased 8.9% in the second quarter to $0.61 per share. We are very pleased with our comp sales performance, which accelerated throughout the quarter.
Starting with gross profit. Our gross profit margin was 34.2% during the second quarter compared with 35% in the prior year second quarter, a change of 80 basis points. The majority of the decrease was a combination of increased freight and merchandise mix. Freight expense increased by nearly 40 basis points, reflecting higher trucking rates related to driver shortages. Merchandise mix negatively impacted margin, which declined by approximately 30 basis points. As Bob mentioned, we have made strategic decisions to expand assortments focused on providing greater value to our customers. Distribution expenses increased nearly 10 basis points, primarily driven by the expense associated with our new distribution center in Windsor, Connecticut. This facility opened in June of last year. We should annualize the year-on-year expense impact of this additional facility in the second half. Excluding acquisition-related costs, SG&A expenses were 23.7% of sales for the quarter compared with 24.1% in the second quarter last year. Payroll-related expenses drove the majority of the improvement, representing 30 basis points, as we had lower expenses as a percent of sales for insurance benefits, payroll, incentive compensation and payroll taxes. Adjusted operating income increased $11.2 million compared to the second quarter last year, and adjusted operating margin decreased 40 basis points to 10.5% when compared to the second quarter last year. The tax rate for the second quarter was 38.2% compared to 37.9% in the second quarter last year. The increase in the tax rate is due to lower Workers' Opportunities Tax Credits in the current year, resulting from the expiration of certain tax provisions. Looking at the balance sheet and the statement of cash flows. Cash and investments at quarter end totaled $467.7 million compared with $413.7 million at the end of the second quarter of 2013. As you may recall, in September of 2013, our board authorized a $2 billion share repurchase program. Under this authorization, the company invested $1 billion for share repurchases through an accelerated share repurchase program that was launched on September 17. The ASR was funded by $250 million of available cash and $750 million from the private placement of senior notes completed in September. During the second quarter, on May 15, the company received 1.2 million shares, completing the ASR. Altogether, the company received a total of 18.1 million shares under the $1 billion accelerated share repurchase program. The company has $1 billion remaining on its share repurchase authorization. The company did not repurchase shares during the second quarter. And the diluted weighted average shares outstanding for the second quarter were 206.6 million. Our consolidated inventory at quarter end was 6.5% greater than at the same time last year while selling square-footage increased 6.8%. Consolidated inventory per selling square-foot decreased 0.3%. Our inventory turn increased in the second quarter and we expect continued improvement in inventory turns for the full year. We believe that current inventory levels are appropriate to support scheduled new store openings and our sales initiatives for the third quarter. Capital expenditures were $88.3 million in the second quarter of 2014 versus $96.4 million in the second quarter last year. For the full year 2014, we are planning consolidated capital expenditures to be in the range of $360 million to $370 million. Capital expenditures are focused on new stores and remodels, including additional fee development stores; the addition of frozen and refrigerated capability to approximately 460 stores, which has been increased from our previous estimate of 320 stores; IT system enhancements; the expansion of our Joliet, Illinois distribution center; and the initial phases of work on our 11th DC. Depreciation and amortization in the second quarter totaled $49.9 million versus $46.6 million in the second quarter last year, an improvement of approximately 5 basis points as a percent of sales. We continue to expect depreciation expense to be in the range of $200 million to $210 million for the year.
Our guidance for 2014 takes into account the actual performance for the first half. And except for small refinements to the share count and the tax rate, our outlook is unchanged for the second half of 2014 from that which we originally issued on February 26. Our guidance includes the following assumptions:
we anticipate that freight costs will continue to be a meaningful headwind to gross margin, primarily as a result of driver shortages and related wage increases; product margin will remain under pressure based on strategic decisions to invest in certain product categories and drive increased market share. We cannot predict future currency fluctuations, so we have not adjusted our guidance for changes in currency rates. And as we look ahead to the fourth quarter this year, there's one additional selling day between Thanksgiving and Christmas, which returns us to a more normal pattern than last year. Our guidance also assumes a tax rate of 37.2% for the third quarter and 37.9% for the full year. Weighted average diluted share counts are assumed to be 206.6 million for the third quarter and 206.9 million shares for the full year. Additionally, we have not included any acquisition-related costs in our second half guidance as we cannot currently forecast the timing of when these costs will be incurred.
With this in mind, for the third quarter of 2014, we are forecasting sales in the range of $2.02 billion to $2.07 billion based on a low- to mid-single-digit comparable store sales increase and 7.2% square footage growth. We anticipate the gross profit margin will continue to be challenged by year-over-year freight increases as well as our commitment to providing greater value to our consumers in this challenging macro environment. Diluted earnings per share, expected to be in the range of $0.61 to $0.66, which would represent a 5.2% to 13.8% increase compared to third quarter 2013 earnings of $0.58 per diluted share. For the full fiscal year 2014, we are forecasting sales in the range of $8.44 billion to $8.55 billion based on low- to low-mid-single-digit increases in comparable store sales and 7% square footage growth. Diluted earnings per share, expected to be in the range of $2.94 to $3.06. This represents an increase of 8.1% to 12.5% over 2013 earnings per share of $2.72. With that, I'll now turn the call back over to Bob.
Bob Sasser:
Thanks, Kevin. Our initiatives to drive comp store sales are finding enthusiastic acceptance with the customer that, by all accounts, continues to be under pressure to balance their household budgets. Our in-stock on basics is the best ever. Customers are finding more of the things they need and want on each trip. Stores are first-of-the-month ready with chunky displays of basic products. When the customer has money in their pocket and they are ready to shop, we want to be ready with the product they want. We think of the first of the month as 12 additional holidays and we prepare for them as such.
The expansion of wow items are providing customers with bigger sizes, bonus buys and bigger savings across the store. Our category expansions in pet supplies, hardware, household supplies, food, electronics and party are producing company-leading results and comp sales increases. We continue to roll out frozen and refrigerated product to more stores. Our customers like this product. They shop us first and frequently to get the values they need. Seasonal product adds excitement and merchandise energy to the shopping experience with an ever-changing assortment of fun and colorful product right at the front entrance. Our stores are full, fun and friendly with more customer engagement as we strive for the same great experience for every customer in every store every day. As you've likely heard from many retailers, the consumer continues to be under pressure. Our sales initiatives are aimed at responding to those customers' needs by being a part of the solution in their efforts to balance a household budget. We are investing in our customers, they are responding enthusiastically and you can see it in our results. Our second quarter comp store sales increase of 4.5% was our best quarterly comp performance in 2 years. We're expanding market share. Sales came as a result of increases in both traffic and average ticket with the largest increase coming from traffic. Sales growth came from across the store with comp increases in basics and variety fairly evenly divided. Sales strengthened throughout the quarter with our highest comp sales in July and sales momentum has continued into August. Total sales grew 9.5% and we exceeded $2 billion in second quarter sales for the first time in company history. We achieved 10.5% operating margin, down from our record high in second quarter last year, and still the highest performance in the discount retail sector. And earnings per share grew 8.9% to $0.61 per diluted share, in the middle of our range of guidance. We have multiple platforms for growth. In second quarter, we opened 90 new stores, expanded and relocated 20 stores and we ended the quarter with 5,166 stores and square footage growth of 6.8%. The Dollar Tree brand is a benchmark of value for our customers, and there's a great opportunity to grow and expand the Dollar Tree brand in the United States through more stores and more productive stores. The Deal$ brand is serving customers with increased value on even more categories. Dollar Tree Direct continues to broaden its reach to customers throughout North America, and Dollar Tree Canada is growing in size and customer acceptance. As I look to the future, I see exciting opportunity. Our balance sheet is strong. The Dollar Tree business model is powerful, flexible and more relevant than ever, providing extreme value to customers while recording record levels of earnings. It's been tested by time and validated by history. We remain committed to a concept that customers love and we're positioned to continue growing profitably for many years ahead. We have a vision of where we want to go and the ability to get there with infrastructure, capital, and most importantly, a talented management team that has a long history of retail success. It's a great time to be Dollar Tree. Our inventories are clean and fresh. The shelves are full of terrific merchandise, our stockrooms are in great shape and our values have never been higher. We will now address your questions about our second quarter. [Operator Instructions]
Operator:
[Operator Instructions] We'll take our first question from Paul Trussell with Deutsche Bank.
Paul Trussell:
You highlight that pet supplies, hardware, I mean, household, food, electronics, party goods were the categories that were leading the comp growth. But if you can just kind of clarify for us that when you say you invested in expanded assortments of high-value product, exactly what categories are -- does that reference? And how do we think about IMU and mix pressure going forward because of those investments?
Bob Sasser:
Paul, we've always said we're in control of our merchandise markup and we still are. And this was a very conscious decision to -- in a time when the customers were under pressure and traffic was stubborn and everyone was complaining about it, really starting back last year in the third and fourth quarter. We responded by being the solution to their problems and not part of the problem. So we have invested in product. We have expanded some categories. There's really 2 parts to your question. The highest-comping departments, the ones that you listed, the pet supplies and hardware and household products, food, electronics, party, are amongst the highest-percentage comp departments. A couple of those are our highest-volume departments, party and food. So we've had increases by increasing and driving the business in these key departments for our customer. Across-the-board, our variety has grown as well as our consumer products have grown. Our home, especially, was very powerful in second quarter. Some of the items or some of the categories is licensed party goods. We've added license -- the Disney license and Marvel license to our mix. We added Rubbermaid food storage into our housewares. Branded pet food, for an example, when you see pet supplies popping up as one of the leading comp departments. We're offering the king-sized candy bars, not the small candy bars anymore. We've expanded in our dish in our home -- our dish detergent in our home area with some of the cleaning supplies with brands like Dawn and Palmolive. In HBC, we've driven the business on our -- we have branded toothpaste, Crest toothpaste. We have -- in our food and snacks business, STAX potato chips. In our home area again, in our home supplies, household supplies, national brand toilet paper, national brand paper towels. So throughout the store, we've expanded in more space and more inventory and more of the things that our customers are looking for in a tough time, drive the business and -- driving the business in those categories. And we've also been looking at special opportunity buys, wow items, multi-packs, larger sizes for the same prices and really delivering as much value for our customer every day. When they go in the store, they're seeing more value than they've ever seen. And as I said, the proof is in the numbers. Our traffic was up. Our average ticket was up, which has always been stubborn, as you know. It's -- everything's $1, so the average ticket, you've got to sell some more. So more people are shopping us more frequently, our traffic is up. They're staying longer and they're buying more, our average ticket is up.
Paul Trussell:
And just as a follow-up, just to kind of shift gears, Bob. Obviously, in seeking to do the acquisition of Family Dollar, there were some questions from investors looking in on how confident you guys are in your ability to run multi-price point stores. And so perhaps, if you can just give us some additional color on Deal$, the current quarter's performance, but also if you can just take us back a little bit about how the productivity and the operating margins have improved over the time frame of your ownership, what have you learned and how you can benefit from those learnings in your upcoming endeavor?
Bob Sasser:
Paul, I'm going to answer your question in a little different way. I'm not going to comment on the Family Dollar acquisition, as I said -- or Randy said in the beginning. Sorry, Randy. We just can't comment on that and I'm not going to comment on this. If your question is about our Deal$ format, I'm very proud of Deal$. And we are seeing a lot of expansion, a lot of traction in our Deal$. I'll give you a little color on our Deal$ business. We ended the quarter with 216 Deal$ stores. Our comps were single-digit positive in our Deal$ stores. The merchandise mix in our Deal$ stores is a little different than what you find in the Dollar Tree. In addition to lifting the restrictions of the price point, we have a little more consumable mix in our Deal$ stores. Consumable mix for the quarter was about 62% versus 38% for the non-consumable. And as you compare that to our Dollar Tree stores, at Dollar Tree we're about 50-50. And for the quarter, it was -- consumables 50.4% and 49% -- 49.6% in the non-consumable at Dollar Tree. So you can see that the Deal$ mix is a little more consumable. The basket, a little bit about the basket, our average ticket is higher at Deal$, it was $9.51 for the quarter. At Dollar Tree, we're about -- we're always around $8, a little less, $7.80, I think, for Q2. We have lifted the restriction of the price point in our Deal$. So the average ticket with items that are greater than $1 was $14.23. 53 -- almost 54% of all transactions had items greater than $1 also. So our customers in the Deal$ stores are responding positively to the merchandise that we sell that's not $1. Our average unit retail for anything that's over $1 that we sell is $3.15. That's been pretty much where it's been for the past year. We like to see that grow and working on ways to make that grow. I think that's a big opportunity. Greater than $1 item represented 48.5% of Deal$ total sales. So as we've lifted the restriction of the $1 price point, we're seeing exciting growth in Deal$. Again, at Deal$, we can serve more customers with more categories in more ways.
Operator:
We'll take our next question from Scot Ciccarelli with RBC.
Scot Ciccarelli:
Gross margin-related questions as well. Bob, I know you guys have always tried to provide value to consumers. And for the last several years, you've kind of pointed to improving merchandise margins. It sounds like that was not the case this quarter. So I guess the question is does this signal a potential, just kind of philosophical, change going forward regarding how we're viewing merchandise and -- the merchandise sales versus margin mix?
Bob Sasser:
It's a fair question, and I'm happy to say no. It's not really a change in our direction, it's more of a response to the times. We're always, as retailers, it's incumbent upon us to remain relevant to our customers. And as the customer pressures change, we have to react. Other retailers you might see lowering prices. Our price is $1. Instead of lowering prices, and you've heard me say this before, we will invest in more value in tougher times. And we started seeing pressure on traffic and we started hearing from customers back late last year. And our comps weren't as robust as they had been. And as a result, as we always do as good retailers, we chose to drive for traffic and market share. We can sit back and bemoan the fact that customer is under pressure and remains stubbornly under pressure, or we can do something about it. We have done that and we've done what's very core to what we do at Dollar Tree and that is to exceed the customers' expectations for what $1 buys. And in this day and time, as customers are really looking for a way to help balance their budget, we have become a solution to their problem. They look for us to help them out. And if you look at the results, the traffic was up. It drove most of the comp sales, but our average ticket was up also. So as I said earlier, they're coming more often. And when they're there, they're staying longer and they're buying more. They're seeing more product. These values are across the store, too. We speak of things as if it's really just that simple as consumer versus discretionary. It's never really just that simple. We have those 2 big buckets. But if you looked at a little more granular level, you would see that our home business was really driving and carrying a big load in second quarter. And our home business is made up of things that really are either both discretionary and consumable. There's things you need. There's things you want. There's food containers. You need them. You want them. They're high margin. They're not as high margin as our seasonal business, but they're higher margin than our basic consumable business. So we were driving traffic throughout our store. We're looking to gain market share. And frankly, the big issue that hit second quarter, and probably it's going to continue to hit us in the rest of the year, was the freight. As I've always said, when we see an issue, we're always able to respond accordingly. And if we see cost pressures in one area, if we see it coming and we can make plans for it, we can always make allowances and find other ways to save. And we can do the same thing with our freight costs. But this freight driver shortage issue came upon everyone pretty suddenly. We've been expecting something, but we weren't really seeing it until recently. So along with investing in our customer, which I will do again, and driving more sales at a slightly lesser gross margin rate, that was about 30 basis points, in addition to that, in second quarter, we had a 40 basis point pressure on freight, which is also in our gross margin. So that's something we'll deal with as we go forward. This management team is really good at figuring out how to swallow some of these cost pressures and take advantage of other ways of delivering the gross profit. But in the meantime, we're responding by giving our customers more value. That's who we are, that's what we do.
Operator:
We'll take our next question from Vincent Sinisi with Morgan Stanley.
Vincent Sinisi:
Wanted to, first, ask you about really the consumer behaviors that you're seeing. I know you said remains constrained, though, of course, are responding to your initiatives and that fairly increased from a comp perspective throughout the quarter. But can you give any color around stores that may be in relatively higher-income areas versus some that may be on the lower end? And if you are still seeing some differences between kind of the 3 buckets of income of your customers?
Bob Sasser:
Yes. Frankly, it's across-the-board. We really don't see anything that you could point to as a stark demarcation line between the higher income and the lower income. There's always markets wherein some of the lower-income markets and the urban markets, it's always been more highly consumable. But across-the-board, if you start looking at the higher income versus the Middle America suburban, everybody's looking for a value. And everybody likes shopping at Dollar Tree. One of the things that we always pound the table about is it's not just shopping at Dollar Tree because you're looking for something you need. People do that. And it's only $1. It's great value. But our customers also shop us because they enjoy the shopping experience. It's fun. You come in. You walk into the seasonal product. You walk into fun, colorful product, an ever-changing mix. There's always something that you find that you didn't expect to find as a customer. So we have discretionary business, about 50%; consumer business, about 50%. If you look at the mix, you're seeing it's pretty much the same. It's just 50-50. It might be, one quarter, one's up a little and one the other -- differently the next. But still around 50-50. So my answer is that the customers are under pressure, mostly middle income and lower-income customers as anecdotal, I mean, just from what we see. They continue to be burdened and concerned. We've said that. We're not alone in saying that. They're facing higher taxes, higher health care costs, stubbornly high unemployment, although it looks like it might be getting a little better on the unemployment side. Higher cost of living really and no improvement in wages to speak of. They continue to face uncertainty. And we are, as I said, we're responding to them with offering expanded assortments of basic, more wow items, bigger sizes, bonus buys, overall values for the dollar. And they're responding to it. Again, I'm really pleased that several things this quarter, but our sales growth came across a broad range of categories, not one or the other. Our sales growth came from traffic largely, which is, in the retail business, you've got to have the traffic. So we didn't give up our traffic. In tough times, we invested in keeping the traffic coming in the store. But also, in the quarter, our average ticket was up. So when they were in the store, they not only -- more traffic, more footsteps, but when they're in the store, they stay longer and they bought more. Our frozen and refrigerated product continues. We've grown that out to more stores. Our customers respond favorably to that through increased shopping frequency. And on the seasonal and party and toys, discretionary items. By the way, yes, you can afford it. It feels good to walk into a Dollar Tree and you can still buy toys for the kids because they're only $1. And you can still buy party goods for the birthday. Everything's only $1. So that shopping experience in tough times is really worth something. We place value on that.
Vincent Sinisi:
Great. And if I just could ask another question about the expanded high-value items. Can you give a little bit of discussion around do you think that just having some new products into the store is really driving those sales? Or is it how your merchandising? Is it your See What $20 Buys, your Stretch Your Dollar campaigns? Just maybe a little more around the advertising? Or if there's incremental advertising for those products specifically?
Bob Sasser:
It's not so much more advertising. As you know, we're really not an ad-driven company. And advertising price points, there's no price reductions. Price is $1 today, it was yesterday and it's going to be $1 tomorrow. So getting that urgency in our concept has never been something that we've invested a lot of funds in. But in-store is a different story. And yes, we've employed all of the above with signing in the store, with printed material in the store, with merchandise in the store, really beefing up some of those displays and those end caps and those value items and showing them and signing them up and telling the story of what great value saving. By the way, we don't -- we make money on these items. It's just that it's a slightly less margin than maybe our highest-margin seasonal department. So when you go into our home area and you start talking about food containers and storage bags and wraps and all of the things that you need in the kitchen for your household supplies and mops and brooms and all of those kinds of things, we're selling more and more of those products. It's not loss leaders. We make a lot of money on that. But it's not just not quite that highest margin that you get from some of those clearly discretionary products like the seasonal areas. So you're going to find some Bounty in our stores. You're going to find Angel Soft toilet paper. You're going to find STAX potato chips. You're going to find Rubbermaid. You're going to find some name brands. You're going to find some non-name brands, but you're going to find bigger sizes. In other words, a 12-ounce item might be 18-ounce item and it's all $1. Still, it's the same item that you loved in the past at Dollar Tree and we've beefed up the sizes and we've beefed up the value. And we're offering that and they're recognizing it because they're buying it. And our comps are up in tough times, like we are in now. Our 4.5% comp is, I think, probably going to match up very favorably to what you see out there in retail.
Operator:
We'll take our next question from Dan Wewer with Raymond James.
Daniel Wewer:
So Dollar Tree's gross margin rate of 35.9%, you reached that every year from 2010 through 2012 and you'd have to go back to 2003 before you had a higher gross margin rate than that. But last year, margins were down 30 bps, were down 60 bps in the first half of this year. Do you think that we have finally reached the point where it's really difficult to protect margin rate for Dollar Tree with that single price point strategy? This has been a topic for the last decade, but do you think that we've finally reached that tipping point?
Bob Sasser:
I don't. It's not -- I'd like to tell you that the pressure is not on the initial markup of product. It's on our choices. It's still about what we choose to sell. It's still about understanding the value that we need to offer the customer to drive their purchase decision. At the $1 price point is not the issue at hand here. It's really this long and stubborn pressure on the middle income customers, especially the lowest-income customers. And it's been several years now. And it's somewhat not -- it's going to get better, I'm optimistic. But there's not much light at the end of the tunnel. And customers continue to look at -- for value. I would remind you, too, that we still have sector-leading operating margin. We pale only in comparison to our own previous operating margin. But it's a matter of choice, still. We can drive higher margins, but we have chosen to, instead of sitting back and resting on whatever, the 11% or whatever it was, operating margin in the previous year, we've chosen to invest in the customer. We've chosen to invest in more value, more traffic, higher average ticket. We want our customers to think of us as, if money's short, go to Dollar Tree. If you want to have a fun shopping experience, go to Dollar Tree. If you want party supplies, go to Dollar Tree. It's all $1 and it's all great value. So it's a matter of choices. It's not pressure on the cost from an inflationary standpoint. We can still -- we turn down more product than we sell.
Daniel Wewer:
A different topic. On the potential of a 7,000 Dollar Tree stores in the U.S., that's primarily focused on your traditional suburban-market real estate strategy. What precludes the Dollar Tree concept from working in smaller, not necessarily rural markets, but smaller markets than you have historically focused?
Bob Sasser:
Nothing. And by the way, we've been saying 7,000 stores for a long, long time. I can't tell you how many years it's been that long. And the world has changed and our business has changed and our stores have gotten larger and our mix of product has gotten more to the consumer product needs. 50% things you need, 50% discretionary. So we do very well in small markets. We do very well in urban markets. We do very well in rural markets. Our strength is in the suburban markets and Middle America, but there's nothing that precludes us from continuing past the 7,000 mark. I'm not announcing a new number out there, but certainly, we haven't done the math on that for quite some time. You can't find a place where we don't do well, frankly. And I know that sounds like it's bragging, but our stores, 99-point-some percent of our stores are profitable. And as you know, we have stores in the boroughs in the northeast, in Brooklyn and the Bronx, and we have stores in Idaho so...
Daniel Wewer:
But you're thinking that if real estate opportunities were to become available in markets, say, of 50,000 in population, that could work for Dollar Tree?
Bob Sasser:
We're always looking for great real estate at prices that fit our model.
Operator:
We'll take our next question from Matt Nemer with Wells Fargo Securities.
Matt Nemer:
My first question is a follow-up on gross margin. I just wanted to understand the timing around the IMU decision. Is it fair that, that's the kind of decision you make sort of 6 to 12 months earlier? And then should we think of this as a 4-quarter investment cycle that you kind of have 4 quarters of that hit and then it goes away?
Bob Sasser:
Well, I don't know if it goes away or not. It depends on the customer. But certainly, at some point, you start anniversary-ing some of these. But the import goods are a little longer -- a little longer buying cycle. If you remember, we started talking back in fourth quarter about initiatives to drive sales and it's not new to hear us talk about more wow in our stores and those kinds of things. In first quarter, if you went back and looked at our -- I know I spoke about the same kinds of things. And first quarter, we had the terrible weather early on, but then it got better as the quarter went on as the weather went away. So we started getting some traction on some of the strategies that we were talking about then. And of course, that carried on into second quarter. And I think at the end of the first quarter, I said, and by the way, momentum continues into second quarter. And it did. And it got better throughout the second quarter, fourth -- period 4. Period 5 was better than 4. Period 6 was the best of all in the quarter. So we have begun ramping up on initiatives that were begun some time ago. Now looking forward, I will tell you that we think about this as flying an airplane. It's a little stick and a little rudder. We're flexible. We have a flexible model. And when times are tough and we need more traffic, we'll err a little more towards the consumer products. And when times are a little better, or costs are going down sometimes, we may invest in more customers or we may invest in margin. So it really is all about the current environment and how you feel about that future environment. I think it's going to remain tough for the rest of this year. We're not planning on any, in the second half, any macro news that says that things are going to be a whole lot better. So we're planning on continued pressure. And we're planning also on continued pressure on our gross margin from freight. It's in our guidance. So it's baked in there. And of course, we're always working to offset that in other ways. But I think it's -- but we're in control of it. That's I guess the point that I'd like to leave you with, is we're not victims. We're running the business. We've always done it. We've been doing it now for 28, 29 years. And our gross margin, we have ups and downs. And it's all relevant to the customer and what's going on in the world.
Matt Nemer:
And then just as a follow-up on freight. What are -- could you talk to some of the areas that you would look to, to mitigate the impact of that? And with diesel, I know that diesel is down, I think, $0.15 or $0.20 from its peak. Is that one area that we can see as a potential benefit? Or is that actually reset relatively frequently?
Kevin Wampler:
I mean, diesel, as we look at it so far this year, it's really tracking fairly close to last year. So not a big difference one way or the other compared to last year. So there's not a lot of positive or negative there. And it's kind of been in that range for the last almost 3 years, realistically. So whether we could get some, and listen, we'd love for diesel prices to continue to fall and be able to take advantage of that, but there's no guarantee of that at the end of the day. I think, as we look at freight going forward, it's no different than any other item. It's about process. It's about looking at new ways to potentially deal with it. But I mean, I think it's, as we said in giving our guidance, we expect it to be a headwind as we go through this year. And it's really the effect in the second quarter was just a little bit more than what we talked about in Q1. Q1, I think, we said it was about a 30-basis-point effect, negative effect, on our gross profit. In Q2, it was a little closer to 40. But the biggest thing we can do to help ourselves at the end of the day is continue to drive sales, keep market share, take market share, keep people coming in the stores. And good sales help in a lot of ways and I think that's the way we think about it.
Operator:
And we'll go next to Joan Storms with Wedbush Securities.
Joan Storms:
I just -- I was very impressed with the discussion about the ticket because the ticket has been flat for a really long time. And if you could delve into that a little bit. It seems like you're investing in the high-value products and the increased traffic and then that's leading to the ticket. So I was wondering if you could go into that a little bit.
Bob Sasser:
Yes, it's more traffic largely. It's driven by more traffic in the quarter, but also our ticket and that seems to be a trend. It's coming from -- they're coming more frequently to the stores, they're staying longer and they're buying more. We're challenging them to buy more products. We've taken, it's not just the low -- high -- low-margin, fast-turning consumer products that we have ensured that we're going to be in stock in, the things they expect and get when they come in our store. But it's also the surprising value when they come in the store. And some of the stuff is not a low margin, it's just a little less margin that we would normally sell it for. And what it's doing is it's tempting that customer to buy one more item -- wish they would buy one more item, that'd be a big comp. But when they're in the store, we want them to come for whatever the things they need. While they're in there, we want to sell them on trend and on style and on fashion and on wow. Look at this, this is a great item. By the way, I've used this before and it's 20% more this time. So I'm going to buy some more on this trip. Or it might be a new item that they haven't seen before that we've invested in and stacked up front. So it really is and -- it's our buyers creating more value and it's our stores merchandising in such a way to drive more sales. We've talked about customer engagement. We've talked about related sales. We've talked about drive items at the front of our store with the cashier suggesting just one more item as they go out the door. We're tempting our customers to buy more in every way. And we saw the results, good result from that in the second quarter.
Joan Storms:
Great. And then, could you also comment, you talked a little bit about making sure you're really ready for the first of the month and being in stock. Can you comment like on how you've -- are the in-stock that much better for the first of the month. You're really making -- it seems like you're making an effort to have that on time.
Bob Sasser:
Well, first of the month, there's a lot of payroll checks out there. A lot of people get paid at the first of the month. A lot of the government checks go out the first of the month. There's a lot of things. There's a lot more spendable income around the first of the month. And many of our customers, especially the lower-income customers, wait until the first of the month because they just really don't have the ability other times. When they come to the store, we want them to have the best experience possible at the first of the month. So our stores and our replenishment people and our merchants are working ahead of the first of each month for the plans, what's going on which end cap, what's the highest sales opportunities, where can we stack things out, where can we make a difference in the store. By the way, on the basic things, the key items that we know they want on every trip, let's make sure that we're in stock in business. We'll refresh our categories during that period of time. We will stack out more during that period of time. We will plan our end caps around first-of-the-month ready. And it's, as I said, it's sort of like having another season. It's when you set Easter and you first roll it out and you put it all on the sales floor and you build the end caps and you build -- put the signing in place. And the night before, you're walking around and you patting it down and looking to make sure and checking it off. Our entire organization is focused on the first-of-the-month sales. Whether it's the stores and the store managers, the buyers, the replenishment people, the logistics people, we all plan our business, to a large degree, around those firsts of the month, especially in the basic categories. Don't tell others we do that, by the way. We're going to keep that our secret.
Operator:
We will take our final question from Meredith Adler with Barclays.
Meredith Adler:
I'd like to talk, first, about just brands and you clearly are carrying more brands. Is there any change in your discussions with vendors? Are they more willing to make smaller packaging? Are they excited about the potential of having broader distribution of their products? Or are you just now deciding to carry those items?
Bob Sasser:
It's always a choice. And then, on the first question, our manufacturers like doing business with us. Obviously, there are some things that they can't do business with us on. But things like small appliances, you're never going to find George Foreman grills at a Dollar Tree store, but there are -- the consumer products people really like our business. We're a large retailer with a -- we cut a large swathe across 48 states and Canada. We engage a lot of customers. You can get your brand in our stores and it gets noticed and people see it and consequently it builds your brand equity at Dollar Tree. At Dollar Tree it's all about the value, though. So again, it's choices. And brands may typically, not always, but typically, come with a little lower margin, maybe a little higher sales rate, but a little lower margin. So we're always balancing. We're always balancing the name brand offering with the private label name-brand-equivalent offering, which has a little higher margin. And by the way, our customer really responds to larger sizes and bigger values. When given the choice between the brands, all things equal, they like the brands. When all things aren't equal, they usually go for the bigger sizes and the bigger quantities. But from time-to-time, we've always introduced brands and we continue to look for that. Our brand vendors like us. We're, I believe, and we've always aspired to be, good business people and good merchants. And what I mean by that, our concept is simple
Meredith Adler:
Great. And I just have one other question about you mentioned fee development and that was, I guess, included in CapEx. But does that imply that you are building -- starting to really focus on building more freestanding stores? Because presumably, you don't have fee development if you're going into a shopping center.
Kevin Wampler:
No. Meredith, a couple of years ago, we did start looking at fee development and bringing a few projects out of the ground ourselves. Obviously, if you think back a couple of years ago, the developers were still capital constrained and many of them still are today, and so there were not as many new projects. And the other thing we found, as we went through this process, is we really like the idea of having a store located where we want it, the right size, the right shape, it has 4 walls instead of 6 or 8 at the end of the day. And basically, the linears lay out better, the adjacencies for merchandising lay out better. And we can put our best foot forward. And we've found that these locations have performed very well, the ones we've done. Now it's a small subset of our overall openings in any given year, but it's something that we like and will continue to be part of our overall portfolio process.
Randy Guiler:
Thank you for joining us on today's call, and thank you for your continued interest in Dollar Tree. Our next scheduled earnings conference call will be Thursday, November 20, 2014. Have a good day.
Operator:
That does conclude today's conference. We appreciate your participation. You may now disconnect.
Operator:
Good day, and welcome to the Dollar Tree, Inc. first quarter earnings conference call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Vice President, Investor Relations, Mr. Tim Reid. Please go ahead.
Timothy Reid:
Good morning, and thank you, Levi, and welcome to the Dollar Tree conference call for the first quarter of fiscal 2014. My name is Tim Reid, I'm Vice President of Investor Relations for Dollar Tree.
Our call today will be led by Bob Sasser, our Chief Executive Officer, who will provide insights on our performance in the quarter and recent developments in our business. Kevin Wampler, our Chief Financial Officer, will provide a more detailed review of our first quarter financial performance and provide our guidance for the remainder of 2014. 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 current report on Form 8-K, quarterly report on Form 10-Q and annual report on Form 10-K, all of 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 planned remarks, we will open the call to your questions. [Operator Instructions] And now I'd like to turn the call over to Bob Sasser, CEO of Dollar Tree. Bob?
Bob Sasser:
Thanks, Tim, and good morning, everyone. This morning, we announced our results for the first quarter 2014. Comp store sales on a constant currency basis increased 2% in the quarter, driven primarily by increased traffic with a small increase in average ticket. Adjusted for the impact of Canadian currency fluctuations, the comp store sales increase was 1.9%. This was on top of a 2.1% comp in the first quarter of last year and a 5.6% comp the year before.
Total sales grew 7.2%, to $2 billion. Operating income increased by $15.4 million or 7.1%. Operating margin was 11.6%, matching last year's all-time high first quarter operating margin. Net income increased 3.6% to $138.3 million. And earnings per share increased 13.6% to $0.67 compared with first quarter 2013 earnings of $0.59 per share. We believe that our model is right for all times. We offer the customer a balanced mix of consumable merchandise they need every day, alongside assortments of high-value, seasonal and basic discretionary products and all at $1. Our sales growth in the first quarter was the result of increased sales in both consumable and discretionary products with our seasonal and discretionary product growing at a slightly faster rate as planned. Top-performing categories included candy, checkout and trend products, stationery, Valentine's and Easter seasonal merchandise and frozen and refrigerated products. As was the case in the fourth quarter, we were not immune to the impacts of the unusually long and harsh winter. Weather impeded customer traffic well into March, created snarls in our merchandise flow and resulted in higher-than-planned freight, logistics and utility costs. It's not surprising then that, in terms of geography, performance in the first quarter was strongest in the southern zones led by the Southwest and the Southeast followed closely by the Midwest. Our performance was weaker in the Northeast. Sales strengthened throughout the quarter with our strongest comps in April, reflecting the Easter calendar shift and our strong Easter seasonal performance. We ended the quarter with increasing sales momentum that has continued into May. Looking forward, we're positioned for continued relevance to the customer, sustained growth and increased profitability. We have room to grow and the ability to grow in many different ways. We're growing by opening more stores, by increasing the productivity of all stores and by developing new formats, new markets and new channels of growth vehicles. During the first quarter this year, we opened 94 new stores and we relocated and expanded 28 existing stores for a total of 122 projects. Total square footage increased 6.8%. We ended the quarter with 5,080 stores and we're on track with our plan for the full year, which includes 375 new stores and 75 relocations and expansions, for a total of 450 projects across the U.S. and Canada. As a reminder, square footage for the full year is planned to increase 7% over fiscal 2013. In addition to opening more stores, we continue to develop our strategy to increase productivity in all stores. Some of our sales initiatives include category expansions. Our customers are finding more value as we continue to rationalize and expand assortments in candy, stationery, health, beauty and eyewear, as well as home and household products. Across the chain, customers are seeing more powerful seasonal and party presentations that create excitement and a fun shopping experience. We plan for our store fronts to change like the leaves on the trees, creating seasonal energy in our stores. In the minds of our customers, we want to own the seasons at the $1 price point. Store associates are emphasizing more effective customer engagement throughout the store and at the front end to drive sales of related items through cross-merchandising and suggestive selling. Our goal is to provide value in a shopping experience that exceeds the expectations of every customer in every store every day. We're doubling down on being first-of-the-month ready with an increased emphasis on chunky displays of basic consumable core items. We're reintroducing our See What $20 Buys, along with our Stretch Your Dollar campaign through in-store promotions and digital media. And to satisfy basic needs and to drive increased shopping frequency, we continue to expand our frozen and refrigerated category. In the first quarter, we installed freezers and coolers in 112 additional stores. We now offer frozen and refrigerated products in 3,269 stores, and we're on track with our plan to add freezers and coolers to 320 additional stores and to expand the frozen and refrigerated sections in 50 stores this year. This category continues to serve the needs of our customers and it's a reason to come into the store more often. This increase in shopping frequency provides the opportunity to increase sales across all categories, including our higher-margin discretionary product. Another key component of our growth strategy is the expansion of Deal$, Dollar Tree Canada and Dollar Tree Direct. Our Deal$ format extends our ability to serve more customers with more categories and increases our unit growth potential. Deal$ stores deliver low prices on everyday essentials, party goods, seasonal and home product. By lifting the restriction of the $1 price point at Deal$, we're able to serve more customers with more products at value prices every day. We ended the quarter with a total of 217 Deal$ stores and growing. Our Canadian integration and expansion continues. We opened 11 new stores in the first quarter under the Dollar Tree Canada brand and ended the quarter with 189 Canadian stores, well on our way to achieving our growth plan for the year. Leveraging the buying power of Dollar Tree, our merchants are sourcing higher-value product and our Canadian customers are finding broader, more exciting assortments and better values in the stores. We see enormous potential in Canada. As we grow and improve, we believe the Canadian market can support up to 1,000 Dollar Tree stores. This is in addition to the 7,000 store potential for Dollar Tree in the United States, plus additional growth in our Deal$ format. Our goal is to be recognized by customers as the leading retailer in Canada at the single price point of $1.25, just as we are in the U.S. at the $1 price point. Adding to our growth strategy, Dollar Tree Direct, our e-commerce business has expanded rapid -- rapidly expanding. Dollar Tree Direct provides an opportunity to broaden our customers' base, drive incremental sales, expand the brand and attract more customers into our stores. Our customer traffic continues to grow as we expand the breadth of assortment and points of contact with customers online. Dollar Tree Direct and Deal$ Direct now have over 4,000 items available online, an increase of 50% versus the same time last year. This increase in assortment is showing up in our customer visits. In the first quarter, our online traffic increased 19% over the first quarter last year. We've expanded the functionality of our mobile platforms, adding the ability for shoppers to post reviews of products and to share their Dollar Tree stories via their mobile devices. Over 2.2 million people visited the mobile version of our site in the first quarter, an increase of more than 34%. Dollar Tree Direct is gaining customers every quarter, and we expect to see sustainable growth in our Dollar Tree Direct sales. Check us out online. There's always something exciting going on at Dollar Tree. As you know, we've always planned to support our growth with investments in infrastructure and distribution capacity ahead of the need. We recently broke ground on a 250,000-square-foot expansion of our distribution center in Joliet, Illinois. This project will bring the total size of the facility to 1,450,000 square feet, an increase of 21%. The project is scheduled for completion by year end. We're also in the early stages of work on our 11th distribution center. We'll provide more details on this project as the plans are finalized. Now I'd like to turn the call over to Kevin who will give you more detail on our financial metrics and provide guidance.
Kevin Wampler:
Thank you, Bob. As Bob mentioned, our diluted earnings per share increased 13.6% in the first quarter to $0.67 per share. This reflects our sales growth, expense control and the impact of share deliveries in the first quarter as part of our $1 billion accelerated share repurchase program.
Starting with gross profit. Our gross profit margin was 34.8% during the first quarter compared with 35.2% in the first quarter last year, a change of about 35 basis points. The decrease resulted from higher freight and distribution expenses. Freight expense increased by 30 basis points reflecting higher trucking rates, driver shortages and weather-related disruptions on inbound trucking, impacting deliveries to our DCs and reducing the opportunities for back hauls. Excluding the freight impact, merchandise margin was slightly higher than the first quarter last year. Distribution expenses increased 25 basis points, primarily driven by the expense associated with our new DC in Windsor, Connecticut. This facility opened in June of last year. We should annualize the year-on-year expense impact of this additional facility in the second half. These 2 items were partially offset by reduced shrink expense, leverage on occupancy costs and continued improvements in initial markup. SG&A expenses were 23.2% of sales for the quarter compared with 23.6% in the first quarter last year. Payroll-related expenses declined by approximately 50 basis points reflecting lower expenses for incentive compensation, medical benefits, retirement plan contributions and workers' compensation. We also had lower expenses for legal fees, as well as leverage associated with the comparable store sales increase. These reductions were partially offset by increased utility costs related to the colder weather, which affected both usage and rate. Operating income increased $15.4 million compared to the first quarter last year, and operating margin remained at 11.6% compared with the 11.6% operating margin in the first quarter last year. The tax rate for the quarter was 38.2%. This compares with a 38.1% tax rate in the first quarter last year. Cash and investments at quarter end totaled $387.1 million compared with $383.3 million at the end of the fiscal first quarter 2013. As you may recall, in September of 2013, the Board of Directors authorized a $2 billion share repurchase program. Under this new authorization, the company invested $1 billion for share repurchases through an accelerated share repurchase program that was launched on September 17. The ASR was funded by $250 million of available cash and $750 million from the private placement of senior notes completed in September. We received 1.9 million shares as part of the ASR in the first quarter. Subsequent to the end of the first quarter, on May 15 of 2014, the company received an additional 1.2 million shares completing the ASR. Altogether, the company received a total 18.1 million shares under the $1 billion accelerated share repurchase program. The company has $1 billion remaining on its share repurchase authorization. The diluted weighted average shares outstanding for the first quarter was 207.7 million. Our consolidated inventory at quarter end was 3.3% greater than at the same time last year, while selling square footage increased 6.8%. Consolidated inventory per selling square foot decreased 3.3%. Our inventory turn increased in the first quarter and we expect continued improvement in inventory turns for the full year. We entered 2014 with leaner store-level inventory than last year, reflecting our inventory management plan. We believe that current inventory levels are appropriate to support scheduled new store openings and our sales initiatives for the second quarter. Capital expenditures were $71.9 million in the first quarter of 2014 versus $103.2 million in the first quarter last year, reflecting our investments to expand distribution capacity. For the full year of 2014, we are planning consolidated capital expenditures to be in the range of $350 million to $360 million. Capital expenditures are focused on new stores and remodels, including additional fee development stores; the addition of frozen and refrigerated capability to approximately 320 stores; IT system enhancements; the expansion of our Joliet, Illinois distribution center; and the beginning phases of work on our 11th distribution center. Depreciation and amortization in the first quarter totaled $50.8 million versus $45.1 million in the first quarter last year, an increase of approximately 10 basis points. We expect depreciation expense to be in the range of $200 million to $210 million for the year. Our guidance for 2014 takes into account the actual performance in the first quarter, and except for small refinements to the share count and the tax rate, is unchanged from that which we issued in -- on February 26. It includes the following assumptions. First, we were pleased with the results of our May 1 ocean freight negotiations, which were consistent with the assumptions in our previous guidance. As always, we cannot predict the direction of diesel prices for the next year. For this reason, our guidance assumes that diesel prices will be similar to their current levels, on average, throughout fiscal 2014. We also cannot predict future currency fluctuations. We have not adjusted our guidance for changes in currency rates. And as we look ahead to the fourth quarter, this year, there's 1 additional selling day between Thanksgiving and Christmas, which returns us to a more normal pattern than last year. Our guidance also assumes a tax rate of 38.4% for the second quarter and 38.3% for the full year. Weighted average diluted share counts are assumed to be 206.7 million shares for the second quarter and 206.9 million shares for the full year. While we still see share repurchase as a good use of cash, our guidance assumes no additional share repurchase. With this in mind, for the second quarter of 2014, we are forecasting sales in the range of $1.97 billion to $2.02 billion based on a low-single-digit comparable store sales increase and 7.2% square-footage growth. Diluted earnings per share are expected to be in the range of $0.58 to $0.64, which represent a 3.6% to 14.3% increase compared to the second quarter 2013 earnings of $0.56 per diluted share. For the full fiscal year 2014, we are forecasting sales in the range of $8.37 billion to $8.54 billion based on a low-single-digit increase in comparable store sales and 7% square footage growth. Diluted earnings per share are expected to be in the range of $2.94 to $3.12. This represents an increase of 8.1% to 14.7% over 2013 earnings per share of $2.72. With that, I'll turn the call back over to Bob.
Bob Sasser:
Thanks, Kevin. In summary, during the first quarter 2014, comp store sales grew 2%. Customers are visiting our stores more often, and we're attracting new customers every day. Both traffic and average sale were positive with the results being driven primarily by increased customer traffic. Our sales strengthened throughout the quarter with the highest comp sales in April. Sales momentum has continued into May.
Total sales grew 7.2% to a first quarter record $2 billion. We achieved 11.6% operating margin, tying our first quarter record set last year. And earnings per share increased 13.6% to $0.67. We opened 94 new stores, expanded and relocated 28 stores and ended the quarter with 5,080 stores and square footage growth of 6.8%. We expanded frozen and refrigerated product to 112 additional stores for a total of 3,269 stores across the U.S. Our inventory is balanced and increasingly productive. Our turns increased in the first quarter and we entered the second quarter well prepared for new store growth and customer demand. And we continue to manage our capital for the benefit of long-term shareholders. We invested more than $1 billion for share repurchase over the past 4 quarters and have another $1 billion authorization remaining. Now in our 28th year, Dollar Tree has built an exemplary record of consistent, profitable growth. This performance has been the result of the collaborative efforts of tens of thousands of Dollar Tree associates working together to deliver value to every customer at every store, every day. As I look into the future, I see even more exciting opportunity. Our balance sheet is strong. The Dollar Tree business model is powerful, flexible and more relevant than ever, providing extreme value to customers while recording record levels of earnings. It has been tested by time and validated by history. We have multiple platforms for growth. The Dollar Tree brand is a benchmark of value for our customers, and there's great opportunity to grow and expand the Dollar Tree brand in the U.S. through more stores and more productive stores. The Deal$ brand is serving customers with increased value on even more categories. Dollar Tree Direct continues to broaden its reach to customers throughout North America. And we're working to build, expand and improve the Dollar Tree Canada brand. We remain committed to a concept that customers love, and we're positioned to continue growing profitably for many years ahead. We have a vision of where we want to go and the ability to execute with the infrastructure, capital, and most importantly, a talented management team that has a long history of retail success. It's a great time to be Dollar Tree. As we enter the second quarter, our inventories are clean and fresh, the shelves are full of terrific merchandise, our stockrooms are in great shape and our values have never been higher. We will now address your questions. [Operator Instructions] Levi?
Operator:
[Operator Instructions] And we'll go to our first question from Scot Ciccarelli with RBC Capital Markets.
Scot Ciccarelli:
A little bit more -- I was wondering if you could give us a little bit more, Bob, on the cadence of the quarter. First of all, how large was the volatility, kind of when you look through the quarter. And then number two, any idea kind of how to size any kind of weather impact and your general thoughts on how much weather may have impacted the sales trends?
Bob Sasser:
Yes, Scot. Well, basically, as I said earlier, the sales strengthened throughout the quarter. April was the strongest. There was the shift of Easter, as you know, which helped April, as well as the weather continued to improve a little bit as we got into April. The quarter was terrifically impacted by named storms. Just as a little reminder, we had 26 named storms across the season last year. 11 of those were in first quarter. And as we moved into February, there were 6 in February; there were 4 in March, almost 1 a week; and then 1 in April, the very first week of April. So as we moved through the quarter, as weather improved and as we got closer to the Easter holiday, our sales strengthened and that momentum has continued into May. Both consumables and our discretionary categories grew. Both were comp positive with the discretionary business only slightly growing at a faster rate. In terms of geography, as you might guess, the southern zones did better. Our sales were led in the Southwest followed by the Southeast and then the Midwest and, of course, the Northeast, which was the most impacted by the negative weather that was -- lagged along. Top-performing categories, we already talked about, were our candy and our checkout and our trend. Our stationery business was very strong. Valentine and Easter, seasonal, even Valentine, even with the horrible weather the week of Valentine's Day, we had acceptable Valentine's Day season. So we're pleased to have come out of that as we did. And of course, we continue to grow our frozen and refrigerated as well as our snacks and beverages.
Scot Ciccarelli:
But Bob, was the Northeast negative in the quarter?
Bob Sasser:
I think we don't -- I'm not going to break it out, but I would characterize it as it was lagging, I guess.
Scot Ciccarelli:
But that, specifically, the Northeast, recovered as we got through kind of April and into May?
Bob Sasser:
Absolutely. It was weather. The Northeast, as you know, was the most impacted by weather. Valentine's Day, we had storms. We had all the bad stuff that went on there. So I'm not trying to give you a weather report, just trying to share with you the cadence of the sales. Our sales strengthened because of weather improving and because of getting closer to Easter. As you went through the quarter, our sales strengthened. February into March and then into April, with April being the strongest.
Operator:
And we'll go to our next question from Matthew Boss with JPMorgan.
Matthew Boss:
Guys, on the gross margin front, can you speak to underlying drivers of the core merchandise margin being positive here, opportunities going forward and what you're seeing on the sourcing front today?
Bob Sasser:
Yes. The -- as I've always said, we're in control of our merchandise margin and we -- our merchants have managed that just terrifically over the years. Our basic purchase markup, I guess, on our margin was solid and slightly better. The shrink also improved as a component of our gross margin. The -- sort of the drag was the transportation cost component of our gross margin.
Kevin Wampler:
Yes, I think just to give maybe a little color on the transportation costs. If you look at it, the weather definitely impacted us. Definitely, where we saw the biggest impact was in the Port of New York, which got backed up significantly, a big disruption there. First, the weather did -- backed it up and then there was a lack of equipment because truck chassis were not being returned and put back into use within the business. So that was a big problem. And as well as the fact that in Vancouver, we had some disruption from the truckers' strike for a period of about a week to 2 weeks, roughly. So those are definitely things that were not expected. To move freight, we had to pay some higher rates to make sure we could keep things moving, so there are some onetime costs there. I would tell you in general, though, as we go forward, we are seeing and it's built within our guidance, is the idea of the fact that there are some pressures on freight costs within our business. There is a somewhat shortage of truckers out there. In some regards, they changed the rules of operations for truckers last summer, so the amount of hours they can spend on the road and so forth, and it does have a direct impact on the industry at the end of the day. But that is built into our model and into our guidance, but we could see some continued pressure there as we go forward.
Matthew Boss:
Great. And then one quick follow-up. On capital allocation, you guys had talked to comfort operating with more leverage on the books, the ASR is now complete. Can you just talk about priorities on the capital front?
Kevin Wampler:
Sure. I mean, I think, as you've heard me say before, as we look at it, obviously, the best use of $1 is building another Dollar Tree store. We have plans to open 375 new stores this year and 75 relocations, so 450 projects there. So that's always our first and foremost. We're going to continue to work on our infrastructure from the standpoint of we're expanding DC3 for us, which is in Joliet. We're looking at DC11, trying to put that on the board and plan that out accordingly. So those are going to be uses of capital as we continue to go forward. After that, as we've always talked about, there's acquisitions, which, historically, the last one we did was Canada. So it's not -- nothing going on there. Then you get into dividends and the Board of Directors, basically, has looked at that in the past and we've talked about that, and we really feel like we want to put our money towards growing the company. And then returning to shareholders through our share repurchase program, which is where we've been, a good way for us to return the value to our shareholders at the end of the day. So I don't think our overall thought processes have changed any -- in any regards in that way. And again, the ASR has been complete and we'll go from there.
Operator:
And we'll go to our next question from Joan Storms with Wedbush Securities.
Joan Storms:
So I had a question on your merchandising and your -- the non -- I mean, the discretionary categories have jump pretty well. I know for competitive reasons you don't want to disclose a lot about that, but can you hint anything about what is going on there going forward. And also on the comp scene, tell us what you think about the consumer these days? And the multiple has been hit a little bit for a low single-digit comp versus a mid-single-digit comp. And what does it take to get sort of back to that?
Bob Sasser:
Okay, Joan, I'll give it a shot here. We always talk about our merchandise assortment. It's a balanced mix of things people need and things people want. So basically, the things you need every day is faster-turning merchandise. It creates traffic in our stores. It's a reason to shop Dollar Tree. You go there for all the great values on paper goods and HBC and household supplies and all the things that you need that you consume on a frequent basis. And that adds shopping trips to our stores. It also serves our customer needs very well. Alongside that, we always strive to sell a balanced mix, which is also the discretionary merchandise. We're very proud of our party business, where our seasonal business is. We had talked about it as changing like the leaves on the trees and what that means is the fronts of our stores are always changing. We place great -- we place a lot of importance to our shopping experience at Dollar Tree. People -- customers shop Dollar Tree because we have great values on things they need and it's a fun experience. They always find something that they didn't expect. They find things for the party. They'd find things for the season. They'd find toys for the kids. And as we say, everybody leaves happy because at Dollar Tree you can still afford to splurge even in tough times and buy those things for your kids. So we always plan to sell and we manage our business appropriately, mixing out that balance between products needed and products that are discretionary. It's about a 49 to 51 discretionary to needs and sometimes it goes 50-50 and it's plus or minus in that range. And that's the way we plan our business. It's not by accident. It's by plan. It's one of the reasons that our operating margin is the highest in our sector and always has been. We strive to exceed the expectations of our customer, not only with the values that they need, but also the shopping experience. You come to Dollar Tree because, "I enjoy shopping Dollar Tree. I really like to go to Dollar Tree. I take my kids and I can buy them things that I couldn't buy in other places." And you hear those kinds of experiences from our customers. As to the customer, I think the customer is still burdened and worried and it's just been -- it seems like there are some signs of improvement out there, but the pressure remains and it's just been a long, stubborn period of high unemployment and high costs and anxiety over uncertainties. So it's been a real strain on family budgets. Our job at Dollar Tree, as always, is to be part of the solution. So once again, we try to offer the things our customers need. As they need more of the consumable products, we've increased that in our mix in our stores. Again, striving for that balance and then to exceed their expectation for what they can buy on each visit, every customer, every store, every day.
Operator:
And we'll go to our next question from Paul Trussell with Deutsche Bank.
Paul Trussell:
Want to just ask about new store productivity. It was a little bit lighter than we had modeled in kind of your historical average, but you also opened up a few more stores than we modeled for 1Q. So just wanted to ask about maybe the timing of the openings, if that had any impact. And just what you think about new store productivity moving forward.
Bob Sasser:
Well, I'm not concerned about it. It's a little lower than you might have expected. We have changed our cadence a little bit. The weather had an impact on that. We opened up in the first quarter fewer of our urban stores, which are typically the higher-margin, the higher-sales-per-square foot stores. We've got still got those coming, but we didn't open any in the first quarter. Weather had an impact. It delayed some of our openings in the first quarter, as well as impacting customer traffic. So having said that, I mean, it's all annualized number. So we've got very few weeks and days, in some cases, to use in our annualization, but it's not concerning. We still believe in the concept and our customers, when they can get out, they're shopping in our stores and I believe we're going to see the productivity rise as we go through the year.
Paul Trussell:
That's helpful. And just, Bob, we've had pretty mixed results across a lot of retailers year-to-date. I just wanted to get your thoughts on the health of the consumer today. Obviously, Dollar Tree is positioned well regardless of where we're heading from an economic standpoint, but what are you sensing as you hear from customers and walk stores? Do you believe that the environment is improving a bit? Or is it still a very challenging marketplace for your core consumer?
Bob Sasser:
I believe it's still challenging, Paul. The lowest demographic -- income demographic consumers have especially -- the low-middle and the lowest have especially been pressured with less in their food stamps and less in their entitlements. And then the talks about it. There's still the unemployment issues that remain high. There's always concern about how long the benefits are going to last until I get a job. So it's a worried and concerned consumer. I believe that we're well positioned as you can be. Again, we strive to offer that balanced mix. Everything is $1 at Dollar Tree. So you can come to Dollar Tree and you can buy the things you need every day and for only a little bit of money. So that's -- I don't think that has changed. It feels to me like things are improving, but it doesn't feel like the consumer has actually bought into that and they may never buy into that, Paul. I mean, I think we've gone through a time where people have been forever touched by, in some way, either through high unemployment or just the ability to run their families or run their businesses and all that goes with the down economy, I think they've been forever changed in their habits. We continue to see new customers. Our traffic continues to grow. Some of it is more frequent shopping by existing customers. Some of it are still those people that come in and say, how much is this, which is a clue that they haven't been there before because, obviously, the answer is $1.
Operator:
And we'll go to our next question from Charles Grom with Sterne Agee.
Charles Grom:
Great quarter here. So, Bob, when you take a look back at the improvement in your sales per square foot over the past 6, 7 years, it's pretty impressive, I think we'd all agree on that. But since the third quarter of '12, comps have been in the 2% range, traffic is positive, but certainly, not what you were doing 5, 6 years ago. And I guess my question is when you look out over the next 5 to 10 years and you look at the opportunities within the 4 walls of the store to improve productivity, where do you think it can go? And I guess what's the pace of that and, I guess, how do you get there?
Bob Sasser:
It's a -- those 5- and 10-year questions today are really tough to answer. I can tell you what we're doing. I can tell you how we think about running our business and I can tell you how we're going to continue to improve our sales per square foot. We're always about running better stores. We're always focused in our stores with initiatives that speak to increasing average ticket, increasing customer engagement, being the friendly, fun place to shop. We're always -- again, we continue to expand assortments in our store based on customer needs and you can see it in our sales as we've gone through the areas that we've expanded. Assortment-expanded SKUs, you can see are coming up at the top end of our sales. So you can't have -- there are ebbs and flows to any business, stacking comps on top of comps on top of comps. I think if you look at our 3-year stacks, you feel a lot better about it and I believe that comps can continue to improve. But there are, obviously, going to have to be a review of the overview of the last 3 years, the last 5 years and what the next year's comp to that. So we're going to keep driving our business. Our customers love what we're doing. We're in a market that value is of the utmost importance and we're clearly the people that have the value, that we've built the business based on value. Everything's $1. You just can't beat that for value. As we've gone through time, we've continued to expand what you can buy for $1 and we'll continue to do that, adding even more value as we go forward. So over the next 5 years, we're going to continue to grow. We've got a lot of more new Dollar Trees that we can open in the U.S. We have our Deal$ stores that we're using largely in our urban, high-density markets because we think that by lifting the restrictions of price point, we can have even higher sales productivity and serve those customers in those urban markets better. We have Dollar Tree Canada, which is coming along. We're expanding that business. We're up at, I think, 189 stores, somewhere around there from the 86 that we bought. So we continue to grow Canada. There's just a terrific amount of space that we can build new stores, whether it be geography or Deal$, new type store or our Dollar Tree Direct business alongside of our Dollar Tree business. So more stores, continuing to focus on sales per square foot, better stores. And over the next 5 years, our growth trajectory is still going to be amongst the highest in retail, I believe.
Charles Grom:
Okay. And just my follow-up is going to dovetail on your comments there and also the comment follow-up on Matt's question earlier about capital allocation, just want to attack it from a little bit of a different angle. In that -- of the 3 major dollar stores, you guys have historically been the most acquisitive. You did Deal$ several years ago, you went into Canada a couple years ago. Is there anything on the horizon that you guys are looking at to plug in, to enhance that growth in addition to the success you guys have had with the Deal$ stores? And you have a lot of cash on the balance sheet, you're arguably a little bit underlevered. Is there anything you would look to do to accelerate that growth?
Bob Sasser:
We're always looking for good companies, and we're looking for opportunities to enter new businesses. I don't see anything right now, but we are very focused on -- our last acquisition was in Canada and we're really standing that up and getting that going in the right direction and we've got a lot of energy and focus towards that, as well as our Deal$ business. But we're always looking, we're always open to good opportunities.
Operator:
And we'll go straight next question from Anthony Chukumba with BB&T Capital Markets.
Anthony Chukumba:
So I just had a question about sourcing. I'm just wondering if there's anything that you're seeing different from a positive perspective, negative perspective, particularly given the slowdown in the Chinese economy.
Bob Sasser:
We just keep driving our business and about 40% of our product comes from somewhere other than the U.S., mostly from China. I did not make the last trip, but the results of it, the April trip, were -- continue to be strong. We've hit our margin targets again. The market really is open to our kind of business and as much as we go and we actually place orders and lay down orders and we stand by our commitments, we've been -- we spent years building relationships with our Chinese, as well as all of our vendors, to continue to grow. As we've gotten larger in placing larger orders, we've involved more factories and developed more relationships. So that is -- I would characterized our foreign sourcing as being really unchanged and really a strategic advantage that we have over many, especially since we aspire to continue to thrill our customers with the types of products that are -- that we can find offshore, the things like our toy business and our party business and our seasonal business and all our stationery business. There's a lot of that product that comes from somewhere else. Domestically, we continue to drive those businesses, too. We're very proud of our relationships and, obviously, more of our business comes from the U.S. than comes from anywhere else, 60%. So continue to drive those businesses. We enjoy a terrific relationship with many of the large consumer product companies across the country. And I believe that as we continue to grow and the consumer continues to seek value, that part of our business is going to continue to improve and excel.
Operator:
And we'll go to our next question from Dan Wewer with Raymond James & Associates.
Daniel Wewer:
Just want to ask you when you benchmark your performance in Canada against Dollarama, what would be the puts and takes? I know you won't give any specifics on comps or margins. But how much of a differential, I mean, in kind of qualitative terms, you'd be willing to give us?
Bob Sasser:
As we benchmark against Dollarama -- that's a terrific company, by the way, and we're the new guy on the block, so to speak. We're the largest in the U.S. at what we do. But as we go into Canada, we're very humble and we realize that we aren't the largest there. So the first thing is they have the size, they are the large company that's been there a long time. So the growth, I think, is important for us in Canada, more stores. The brand -- building the brand in Canada, many Canadians know Dollar Tree in the U.S., but that's just -- that's not good enough. I mean, you have to be in Canada and you have to be their store of choice, so we're building the brand in Canada. We're growing, we're building size in Canada and all the while we're building store teams and people and the ability to run the Canadian business. There are desires in Canada. There are consumer needs. We're paying very close attention to that. There are things that we don't know still that we're very -- again, that we're very humble and we're willing and eager to continue to evolve to serve that Canadian customer. It's not a Dollar Tree from the U.S. in Canada, it's a Dollar Tree Canada, so building that assortment. But as we benchmark there, we're the smallest guy. We're growing. We have a big idea. And again, we're the only single -- the largest single price point operator in Canada and that's the message that we're trying to get to our consumer.
Daniel Wewer:
Okay. And, Kevin, when you look at your expenses per square foot, that's actually declined now -- declined 2 consecutive years. Typically, you talk about meeting a 1% or 2% comp to maintain a flat expense rate, but you're obviously doing a lot better than that, but it's not -- it doesn't appear to be sustainable in the long run, but I want to get your thoughts on the sustainability of this 1%, 2% drop in expenses per foot.
Kevin Wampler:
Sure. I mean, as I've said before, I know that's a metric that many of you folks use out there. We tend not to use that so much. We always at, as I've said, the line item by line item. And I think, part of it, as we've continued to grow over the last 4 or 5 years, part of it is scale, part of it is technology, part of it is initiatives surrounding certain expenses and how we can do it better. And again, when everything's $1, the pennies count and everybody realizes that it's part of our culture. It's built in from day 1. Everybody realizing that the expense side of the ledger has to be a strict focus as well. So again, I think, as I've said -- as we have said, a 1%, 2% comp typically would help us -- get us flat on our SG&A, but we're always working to try to leverage things. We've got some benefit in Q1 from -- on our medical benefits. Last year, we had huge claims. We had more large claims than ever. It was a really unusual year. Those things tend to be cyclical for some reason and so maybe this year is going to be a better year. You can't always say. But -- so that's something I can't rely on at the end of the day. But as we look at things, we always believe there's room for improvement. We always talk about continuous improvement, continuous ways to improve our business as well as the processes around them. I mean, that's really the way we go about it day in and day out. And as I said, more on a line item basis or detailed line item basis as opposed to looking at it on a per-square-foot basis.
Daniel Wewer:
But you had called out incentive comp. Given that the second quarter same-store sales are starting stronger than that low single-digit guidance, if that were to continue, would it be probable that your incentive comp would increase year-over-year in the second quarter?
Kevin Wampler:
Well, first, I would say your first statement relating to business going forward being stronger than our low single-digit comp, I don't know that I would agree with that. So let's start there at the end of the day. Let's make sure we have that right. We're just saying that...
Daniel Wewer:
But I thought you said it was -- April was better than 2% and then May momentum...
Kevin Wampler:
We said basically, that the strongest period was April, but obviously, part of that is the fact that Easter shifted later, into April. But I think what we're talking about in general is as it relates to our guidance that we've given. So let's start there. And then I think, as we think -- things like incentive comp depend upon -- we have high expectations that we will improve our business. A part of that is at the store level and another big part of it is here in the store support centers. So as we look at those things, if business improves, yes, those expenses may go up. But the hope would be because we're beating sales guidance and you actually leverage them in the long run. So I think it's kind of 2 components that go into it over time is kind of the way I would look at that.
Operator:
We'll go to our next question from Dan Sinder (sic) [Binder] with Jefferies.
Daniel Binder:
It's Dan Binder. I had a couple of questions, just -- first on a point of clarification around the whole Easter shift and April business. When you adjust for the Easter shift, did you still see sequential improvement, April versus March? And then my second question was around the pricing environment. You heard from Target that they're getting more promotional. They already have. Walmart has been pretty competitive since last fall. Just curious, your thoughts on the pricing environment, if you need to react at all.
Bob Sasser:
Dan, since I'm the one that said -- what I said about the sales building throughout the quarter, let me just say again, sales strengthened throughout the quarter, first quarter, and momentum continued into May. All of that's in our guidance, though. We're not giving you new guidance with that comment. We did consider all that in the guidance that we gave for second quarter. As far as the competition, we see all that. I think our values are up, too. Our price is still $1, but the way we, as you know, Dan, we run our business is we offer the most value that we can at the $1 at the margins we're willing to accept overall. And I think if you shopped our stores right now, you'd find some terrific values for $1. It's still $1, but we add more to the product from time-to-time. We have our wow items out there, more wow items than ever. I believe that we're very, very competitive. And having said that, we're just different than the other guys anyway. Our price is $1 yesterday, it'll be $1 tomorrow, it's $1 dollar today and it's all about offering the most value for that $1. And as long as we can do that, then we'll be successful. We feel pretty good about our position.
Daniel Binder:
One of the things that I've noticed in retail over the last several months, and just generally speaking, is retailers have experienced softer sales. You can see it in sort of the way they're staffing the stores, as labor's come out, and then you'll get these inflection points when weather improves and they seem a bit unprepared for the volume, just in terms of longer lines or out of stocks or whatever. I'm just curious if you could give us a little color on how you've been managing labor in your stores.
Bob Sasser:
Well, it's pretty much the way we've managed it for years. We've looked at it on a productivity basis. And of course, we're always looking to employ techniques and labor plans and support our stores in a way that allows us to leverage and improve the productivity of our labor in our stores. We measure it, report on it, our stores have goals that they're trying to meet. As you do more sales, you get more labor, but you are trying to leverage that and that's pretty much the way we've done it for the past 10 to 15 years. I don't think you'll see any longer lines in our stores than you have seen or will see. And frankly, right now, I believe our stores is in a good position from a merchandise standpoint, from -- stockrooms in the best shape they've been in a long time. Our store teams have really done a terrific job of running and improving the standards in our stores, while at the same time, being more productive and driving the sales in the store that can support the labor. So we're going to continue to do that, our stores know how to do that and I'm real proud of whenever they come up with a better labor number because I know it just didn't happen. It's because of plan, it's because of initiative, it's because of focus and trajectorally, they're doing the right things.
Operator:
And we'll take our final question today from Patrick McKeever with MKM Partners.
Patrick McKeever:
I had a question on the impulse initiative and just -- you called it out as checkout as a stronger area of the store during the quarter. So I'm just wondering how much of that ties into what you're doing with impulse merchandise and how that initiative is evolving. I know you had talked about doing more suggestive selling at the register, if you're still doing that. And if you look at that initiative, how would you rank it in order of the various comp drivers for the year, including, let's say, the cooler program?
Bob Sasser:
It's one of the more powerful initiatives that we have, I think, for a couple of reasons
Patrick McKeever:
And for the impact on -- it's obviously more of an impact on average ticket than traffic, right? Did you talk about the average ticket during the quarter? You said it was up a little bit, right?
Bob Sasser:
It was up slightly. Most of our increase was due to traffic. So you've got some puts and takes there. So you're improving your front end. You're improving the impulse sales. At the same time, there are pressures on consumers from time-to-time where they may be buying less more frequently. I think that's happening. We saw some things. For instance, food stamp's not a big number for us, but our traffic on food stamps was about unchanged, but the average sale on food stamps was a little less. I think that's tied directly to the fact that they're getting less food stamps now. That program has been cut back. So you always have some puts and takes, Patrick. Some things, we're always driving our sales and, for instance, in this case, our -- it's right up there towards the top of our comps with our front end and our checkouts and our trend merchandise. But there are always puts and takes in this business. And every plus is not 100% plus. Sometimes it's 1 plus 1 equals 1.5. So that's my answer for that.
Operator:
And that concludes today's question-and-answer session.
Timothy Reid:
Thank you, Levi. Thanks to all of you for your participation in today's call, for your interest in our company and, as always, most importantly, thank you for your investment in Dollar Tree. Our next conference call is scheduled for August 21, 2014, when we will discuss our results for the second quarter. Thank you.
Operator:
And this does conclude today's conference call. We appreciate your participation.