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.

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.

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,…

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.…

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.…

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 Instructions] We'll go first to Peter Keith with Piper Jaffray.

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.

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?

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.

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?

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.

We'll go next to Vincent Sinisi with Morgan Stanley.

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?

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.

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?

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.

We'll go next to Joseph Feldman with Telsey Group.

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?

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.

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...

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.

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.

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.

We'll go next to Stan Binder (sic) [Dan Binder] with Jefferies.

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?

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...

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].

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?

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.

We'll go next to Alan Rifkin with BTIG.

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?

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].

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.

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.

And we'll take our last question from Scot Ciccarelli with RBC Capital Markets.

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?

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.

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]

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?

On the Dollar Tree? I'm not sure I follow.

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.

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.

At this time, I'd like to turn the conference back over to Mr. Guiler for any additional or closing remarks.

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.

That does conclude today's conference. We thank you for your participation. You may now disconnect.