Dollar Tree, Inc. (DLTR) Q2 2017 Earnings Report, Transcript and Summary

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, 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.

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.

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.

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.