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.

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.

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…

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…

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 Instructions] Our first question comes from Matthew Boss with JPMorgan.

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?

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.

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?

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.

We'll go next to John Zolidis with Buckingham Research.

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?

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…

[Operator Instructions] Our next question comes from Michael Lasser with UBS.

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?

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.

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?

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.

We'll go next to Scot Ciccarelli with RBC Capital Markets.

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?

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.

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.

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.

We'll go next to Stephen Grambling with Goldman Sachs.

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?

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.

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?

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.

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.

We'll go next to Denise Chai with Bank of America.

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?

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.

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?

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.

And our final question comes from Dan Wewer with Raymond James.

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.

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?

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.

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?

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.

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.

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.

This concludes today's conference. Thank you for your participation. You may now disconnect.