Good day, and welcome to the Dollar Tree, Inc. Fourth Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Randy Guiler, Vice President, Investor Relations. Please go ahead, sir.

Thank you. Good morning, and welcome to our call to discuss Dollar Tree's performance for the 14-week fourth quarter and for the 53-week fiscal year 2017. On today's call with me will be CEO, Gary Philbin; and CFO, Kevin Wampler. Before we begin, I would like to remind everyone that various remarks that we will make about future expectations, plans and prospects for the company constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors included in today's press release, most recent 8-K, 10-Q and 10-K, which are all on file with the SEC. We have no obligation to update our forward-looking statements, and you should not expect us to do so. At the end of our prepared remarks, we will open the call to your questions. [Operator Instructions] Now I'll turn the call over to Gary Philbin, Dollar Tree's Enterprise President and Chief Executive Officer.

Thanks, Randy, and good morning, everyone. This morning, we announced our results for our 14-week fourth quarter of fiscal 2017. Sales increased 12.9% to $6.36 billion. Our consolidated same-store sales increased 2.4%. By segment, comp sales for the Dollar Tree banner increased 3.8%. For the Family Dollar banner, comp sales increased 1%. This represented our 40th consecutive quarter of positive same-store sales for Dollar Tree banner, and that's every quarter for the past 10 years. And it also represented our third straight quarter of positive comps at Family Dollar as we continue to make progress on rebuilding the business. Our enterprise gross margin rate improved 90 basis points to 33.0%; operating income increased 30.5% to $765.6 million; and our operating margin rate improved 160 basis points to 12%. GAAP earnings per share increased 221.3% to $4.37. There were multiple discrete items during the quarter, including the impact of tax reform, which Kevin will share more detail on in his prepared remarks. Our adjusted EPS was $1.89, a 39% improvement from prior year's quarter and at the top end of our $1.80 to $1.89 range of guidance. I'm proud of our team's performance in the fourth quarter and our results for 2017. We have a dedicated team of associates across each of our business segments that drive our customer engagement and deliver the following results. For Dollar Tree, the banner delivered a solid 3.8 comp along with a 50 basis point improvement in its sector-leading operating margin. The Family Dollar banner delivered its third consecutive quarter of positive same-store sales along with a 6.8% operating margin, a 280 basis point improvement from Q4 last year. Our Dollar Tree Canada team delivered another solid quarter of strong sales coupled with improved margins and leveraged expenses. And our Dollar Tree drink business delivered…

Thanks, Gary, and good morning. Sales and earnings were favorably impacted by the addition of a 14th week in the fourth quarter consistent with the 53-week retail calendar. The extra week contributed $406.6 million of sales and approximately $0.21 to earnings per share. Total sales for the fourth quarter grew 12.9% to $6.36 billion within our guidance range of $6.32 billion to $6.43 billion. Dollar Tree segment total sales increased 14.5% to $3.32 billion, and Family Dollar segment total sales increased 11.1% to $3.04 billion. Enterprise same-store sales increased 2.4% on a constant currency basis or 2.5% when adjusted for Canadian currency fluctuations. On a segment basis, same-store sales for the Dollar Tree banner increased 3.8% or 3.9% when adjusted for currency fluctuations, and the Family Dollar banner increased 1%. Gross profit for the combined organization increased 16.3% to $2.1 billion for the fourth quarter of 2017 compared to the prior year's quarter. The increment -- as a percent of sales, gross profit margin improved 90 basis points to 33% versus 32.1% in the prior year's quarter. Gross profit margin for the Dollar Tree segment was 38% for the fourth quarter, a 50 basis point improvement compared with the prior year's fourth quarter. Factors impacting the segment's gross margin performance during the quarter included lower occupancy costs as a percent of sales due to the leverage from the extra week of sales and comp sales gain and lower shrink and markdowns compared to the prior year's quarter. These are partially offset by higher freight costs. Gross profit margin for Family Dollar segment was 27.6% during the fourth quarter compared with 26.3% in the comparable prior year period. The 130 basis point improvement was primarily due to lower markdown expense as a result of a continued focus on improving our promotional…

Thank you, Kevin. Again, I'm pleased with our performance for the fourth quarter and throughout 2017. I'm extremely proud of our combined Family Dollar and Dollar Tree teams. We continue to make meaningful progress to grow and improve our business. We're well-positioned in the most attractive sector of retail to deliver continued growth and increase value for our long-term shareholders. Our company is now a diversified combination of 6,600 single price point Dollar Trees and 8,100 neighborhood Family Dollar stores, each with its unique ability to effectively serve more customers through all types of markets. This combination of 2 great brands provides great flexibility in managing our growth. I would like to describe our investment in the business that Kevin detailed by line item in his comments. Our view is to take a portion of the tax savings to invest in the business while the majority of the savings will drop to our bottom line earnings and positively drive earnings per share. This is a unique opportunity to invest where our customers will see the greatest impact when they shop at Family Dollar or Dollar Tree store. We're going to invest in our people. I believe hiring more associates at store level, driving more hours into our stores, will create a better shopping experience. As you've heard us describe before, a direct link to our store managers who can best drive the business for their stores and be rewarded with higher bonuses. We will approach this with the same discipline to invest in the right seasons and weeks of the month like we would do any other project and we'll measure it as we put the hours into specific stores. Also, training for associates at store level, primarily for our store managers that have such great influence on their teams…

[Operator Instructions] We'll go first to Rob Ohmes of Bank of America Merrill Lynch.

Gary, I actually was hoping you could talk about what you're seeing in the momentum of your customer? Has there been any slowdown or -- maybe work into that, maybe momentum with your customer thinking about gas prices being up a bit versus last year. Maybe whether you are or aren't seeing any kind of trade up in some of your categories. And then maybe even some color on -- in the markets where labor is tighter and wages are going up, do you see differences in your same-store sales versus markets where that isn't happening?

Thanks, Robbie. If I were to take a look at Q4, you saw some of the categories. On the Dollar Tree side, our seasons -- and punctuated really by the Christmas season, the biggest holiday we have, was just terrific. Credit to the assortment, the excitement in stores, it showed up with great sell-through and we could not have been more pleased with the seasons. And we sort of have always laid down that -- the hurdle we want to jump every year, as every season we come to, we want to jump over it. And certainly, the team did that in the fourth quarter. And for Dollar Tree, it continued into really to Valentine's, a little bit of a smaller holiday, but just a great impact there. And so I would say our -- the mix that you saw in the fourth quarter, consumables and discretionary, saw a better race for each other that we're comping great, so that mix has continued into the beginning of this year. So we're going to overcome, work our tail off on early Easter with winter storms still hitting both coasts. Not thrilled with what March does to an Easter holiday. But I think on the Dollar Tree business, we see the same kind of momentum. At Family Dollar, we did a lot of re-dos this year. We -- if you went into our Family Dollar store, you saw more brands around toys and some of our reinvention of what our customers saw there. And the customer responded favorably. So some of that was a trade up. So we continue to refine our business around the holiday. The consumables is driving the business at Family Dollar. As always, it's the magic of bringing in the seasons, the Wow, whatever we can do there. Now we go into the beginning of this year, we're driven a lot by the tax credits that our customers get. They backed up another few days this year. And so we're really at the beginning of that. So we'll see how our customer responds through March with a few more dollars in her pocket as we go through March. As far as wage pressure, it's hard for us to see a difference in comps. I would say it's more driven by, if we deliver great value in our stores, no matter what neighborhood, we tend to get a lift in that community and that store. So our investment in our people, that I outlined, really, I think, speaks to our opportunity to continue to drive our business by having folks well trained, staff in store, drive the shopping experience. And for both banners, I think when we put those links together, we end up in a good place.

And just on gas prices, have you seen any changes in momentum related to the higher pump prices year-over-year?

Well, it certainly puts pressure on our lower end customer. It's gas prices, rents are up in most markets. You always -- you're never tickled when you know that your customers are under pressure on those things. But I can't tell you that it's affecting us in terms of basket because we've seen that tend to grow at both banners. Family Dollar traffic, a little flatter than Dollar Tree. So we're still split between an urban customer that probably is more walk-in and more mass transit versus rural that does have to get into a car. So I would say it's hard to define what we're seeing on gas prices affect the customer right now. I do know this, it's a few more bucks out of their pocket. It's a few more bucks out of their pocket on rent. So we're very focused on the values up and down the store shelves.

We'll go next to John Heinbockel of Guggenheim Securities.

These are 2 related questions. Number one, if you think about the reinvestment of the tax benefit is clearly the right thing to do. Can you get your arms around an ROI on the $100 million, particularly why are a lot of retailers adding hours, adding -- raising wage rates? Or it's just something that you know it's the right thing to do directionally, but really can't tell what the benefit is relative to your competition. And then, secondly, if you think about those investments and what's happening with freight, has your view on the trajectory of the Family Dollar margin turnaround changed? Does it get kind of pushed out a little bit because of those pressures?

Thanks, John. I think on the first piece, I think you're spot on. I mean, you've heard all that CapEx initiatives, and we're very disciplined on every dollar we put out on the CapEx side, either at stores or frozen food or adult beverage. All those are measured with ROIs. Now we're going to invest in people with $100 million. And we're going to go into it with the same sort of business savvy that says, "Where do we get a $1.50 back if we invest $1?" It doesn't always work quite that way. I think our investment in our people ought to show up with better run stores, stores that are better in stock. Stores that -- around seasons, around first of the month, have what our customer needs. So some of this is a downstroke, in my mind, to help us get our stores on a trajectory. And while everybody is doing some of this, we are in the value sector that I think we have the best chance to have our customer respond more quickly to it. So we're going to measure it. It's going to be targeted by -- just as I said, it's going to be sometimes down to the weeks of the month around key holidays. It's going to be targeted to specific stores that we think we can drive additional business in. So we're going to track it. It's just maybe not as clean as we track our capital projects as we go through the year. The freight side is a real thing right now and it's a component really of some of the driver shortages that we'll see how long that lasts and where we are on diesel fuel. Diesel fuel is sort of back to the future, 2015, we're almost starting…

[Operator Instructions] We'll go next to Matthew Boss of JPMorgan.

So at Family Dollar, gross profit dollar's up 16%, best performance in really recent history. I guess, how should we think about the progression of comps versus gross margin going forward? Is what we've seen so far low single-digit comps and outsized gross margin the last couple of quarters, is that in line with your strategy to date? And I guess, more so what I'm asking is, how should we think about the sales per square foot opportunity from here at Family Dollar?

Thank you, Matt. No, listen, I'll start off by saying, we can always do better. And one comp for the quarter at Family Dollar, quite frankly, we went in with plans that we would do more. But I sort of back up and say, what are the things that are going to drive comp for the Family Dollar business, it comes down to the merchandise. So everything you've heard us talk about on the marketing and merchandising plans is getting back to the EDLP. Winning back customers that have confidence in us on pricing. Private brands, more import, you've heard us talk about those things. It's all under our Smart Ways to Save. The other piece that's a slower burn is we've got to change some of the stores that the customers see. So it's really a 2-prong attack. One piece is let's get new stores out there. So this year there's another 300 new stores that will be next-generation stores. The renovations, we are pleased with last year, we accelerated. We'll do more this year. And I think over time, that's what's going to change both the productivity on sales per square foot and continue to help the margin mix and enhancement as we get the stores that start to sell a better mix of product. So it's a combination of what we can do tactically on merchandise, marketing, touching our customers. Strategically, it's also about how we have to get the right store format across our network, across 8,200 stores, and many of them older than some of you on the call. And so it's going to be a time over -- that we get to change those and change neighborhood by neighborhood on our customer. I think what you see on the margin piece, we need comps. Sales solve all issues. And that's the focus of the Family Dollar merchandising team. Keep changing and work on the mix, drive cost, create value, and over time, get the excitement in the merchandising so that the need starts to change as well. That's still the vision we started off with. We haven't changed our thinking at all. It is maybe sometimes slower than we would like, I know that. But it's the combination of what we see on new store renovations, new stores. And maybe the last exclamation on sales per square foot, it's also how many stores we put into densely populated urban areas because they react distinctly different than a rural, small-town Family Dollar. And so we're working on both sides of that coin to say, "How do we drive productivity in both of them in the mix of new stores that come out on any given year?"

Great. And then just a follow-up on the expense front. So underlying the $100 million tax reinvestment, I guess, what's the fixed cost hurdle that we should think about to leverage SG&A at both Dollar Tree and Family Dollar, both this year and going forward? Meaning, has anything changed on model flow-through or the way that you think about investments other than using some of the tax savings to reinvest this year?

Yes. No, I would tell you, Matt, I don't think anything has changed from a flow-through perspective. If anything, I think over time, we would continue to see flow-through improve on the Family Dollar side. Obviously, this quarter, we saw gross profit improve significantly. Our outlook basically takes into consideration it continuing to improve to some level next year. So I think the flow-through is fine. So again, as we think about our fixed costs and what it takes to leverage those, I think we're still in that -- probably that 2% to 3% range roughly. And again, it varies quarter-to-quarter, and so I always want to think of it on an overall basis. And it's -- so I would tell you, in that 2%, 3% range on a normal basis without a -- the large investment that we're making this year.

And I would just add, maybe what's changed is the investment that we're talking about is obviously, going to affect op income with the flow-through coming down to EPS. But I really think the downstroke on improving the shopping experience is going to be the magic sauce for us as we continue to improve both banners and what the shopping experience can be for both.

We'll go next to Karen Short of Barclays.

I just wanted to clarify something in terms of backing into your EBIT margin guidance. So if I look at fiscal '17, excluding extra week, I get kind of an 8.8% EBIT. And then if I look at your guidance range for fiscal '18, excluding the $100 million investment, I kind of get 8.9% to 9.3% of a margin range. Is that kind of ballpark?

You're directionally correct on the 2017 year, excluding the 53rd week. We would tell you that's probably right around that 8.85% adjusted. And then excluding the $100 million, basically, yes, we would be showing improved operating margin. So that's part of the investment we've made. So that's the pressure point battle as well as the freight. But yes, the operating margin without the $100 million would be increased year-over-year.

Right. And it's about 40 basis points with the $100 million?

Yes.

And then the second question, I just want to clarify, Gary, you made a comment that out of the 250, you're investing $100 million and the rest is going to flow through. But I just wanted to clarify it, in terms of your CapEx, when I look at your CapEx dollars as a percent of sales in '17 versus your CapEx dollars as a percent of sales in '18, it does look like it's increasing by about 100 basis points. So it seems to me that a lot of that additional $150 million is actually going to CapEx. Is that not -- is that the right way to look at it?

No, Karen, I would tell you that whether there was tax reform or not, our CapEx number did not change, basically. We did not make any changes to our decisions of how we were investing in our CapEx related to tax reform. These projects were already in -- on the planning board and in the -- in-flight stages, basically, prior to tax reform. So it did not have an impact on our decisions related to that.

Okay. And then just last clarification question. Of the $100 million, you did say some of this is retroactive to '17, right, for the Family Dollar Defined Contribution Plan. Could you just give us what that dollar amount is?

Yes, so that's approximately $5 million, Karen.

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

Obviously, lots of moving pieces with the diesel you talked about and incremental investments. But what's the right way for the investment community to think about the Family Dollar upgrade margin for 2018? Obviously, you're trying to balance these incremental investments versus what should still be synergy benefits? Can you provide any more color on that?

Yes, thanks, Scot. As we think about the operating margin for our Family Dollar business, as we've said, we do expect to see continued improvement in our overall product margin. We've done a good job the last half of this year controlling our markdowns in a much better way, as we go forward, we'd look to continue that. So I think that's an important aspect of it. That will help, hopefully, more than offset. And we'd actually look for our gross profit to increase in our Family Dollar banner in 2018. And then, obviously, the SG&A is under a little bit of pressure from the fact of the reinvestment. And if you look at the overall reinvestment of about $100 million, it's slanted about 60% Family Dollar, about 40% Dollar Tree. So we'd have to take that into consideration. So I think, on an overall basis, we would look at operating margin to be probably flat to up a little bit in our Family Dollar business.

And, Kevin, related to that, I mean, you guys have obviously talked about kind of synergies and that the spending against it. Any change in the trends of either of those? And are we still getting towards the end of the investment piece of that?

Yes, as we've spoke to synergies, again, the expectation is the achievement of the $300 million run rate by the end of 3 years, which would be July of 2018. And again, we've called out the reinvestment which was roughly $300 million and we've stated to spend more CapEx than OpEx. And -- but yes, we're on track. The -- no major changes in the cost side of that. It's pretty much winding down. We did announce an additional up to 50 rebanners again this year from Family Dollar to Dollar Tree. So there will be a little bit of CapEx there that will continue to flow through, but it's down to fairly minimal amounts.

We'll go next to Dan Binder of Jefferies.

It's Dan Binder. So my question was also around Family Dollar. The division has benefited tremendously on the sourcing side from the combination of Dollar Tree and global sourcing, et cetera, which has led to a fair amount of gross margin expansion. However, the comps or sales, as you know, have probably been a little bit lighter than we expected. I'm just curious, as you think about that equation going forward, do you feel like there's an opportunity to take some of that gross margin, be a bit more aggressive on the price side to help get the comp store sales tracking to a higher rate?

Dan, this is Gary. Well, I think you're right. I mean, with the efforts we've made on the synergy side and like items, really, both merchandising teams did a great job getting us out of the blocks quickly on that piece. You referenced the import piece, which -- we've had a couple of buying cycles now. But I still view there's an opportunity there to find the right suppliers, more factory direct to help us -- it's sort of a 2-pronged effect. One, you get better cost. And secondly, you can find some really exciting product, which is part of the merchandising energy we want to keep working on for both banners and get going on the Family Dollar side. Those are the types of things that I think will help drive comps. Our price checks, we're more competitive than we were when we started this journey. And we're not going to -- if we're going to -- I can't read the future. We're not going to work in a vacuum. I think as we see the environment right now, certainly, it's not the same noise that we heard at the beginning of the year as we saw lots of activity mainly on the grocery side. And I think for our side, the values that we want to present to our customer, what she buys most often in a Family Dollar are the items that we want to be right on, both on the shelf and then on promotional. So it's partially when do we invest in that on the add to give it -- a customer savings above and beyond with a price drop, part of it's what's on the shelf and part of it is also what she gets on her app now. Because with 5 million folks signed up, it's that customer information that I think, over the long run, gives us another arrow in our quiver on giving our customers exactly what they need on the purchase cycles they're on. So we're going to go into this year, we have a great marketing plan. We have our thoughts around how we want to reflect pricing, both every day on shelf and what gets put into the cycles, with both our partners on the vendor side, along with what we want to drive on private brands and imports. So it's a long way of saying, we're going to drive our business really by segment of the market in a way that we think is appropriate. And we've got more than one way of doing that as we go into '18.

And then also, could you just clarify what the $7.5 million in other income was?

Yes. Again, as we noted in our comments, we had a forgivable promissory note related to the State of Connecticut that once certain things were met, it became forgivable. So that has been on our books as a debt instrument, basically. And it was forgiven, so it comes through other income, basically -- nonoperating income.

We'll take our final question from Chuck Grom of Gordon Haskett.

Just trying to connect the dots here on your guidance. So if I include the $100 million of investments and the $68 million in freight and diesel, it looks like operating margins are going to be down 40 basis points. And I guess my question is, if Family Dollar's expected to be flat year-over-year, how do we back into that down 40 for the total company? And then, Kevin, if you also could just address how you see gross margins playing out in 2018 relative to SG&A? It sounds like gross are going to be relatively stable. But I just wanted to see if you can provide some color on that.

I think looking at the operating margin overall for the year, I think at the midpoint, you may be down 40 basis points at the upper end. I don't -- you're down something less than that. So I think you have to think that -- think about it from that perspective. At the midpoint, yes, you would probably see pressure on both banners, operating margin at the upper end. You'd see a little less on the Family Dollar side. That's the way we're thinking about it right now as we go forward. So again, and it's a lot of moving pieces. To your point, as it relates to the investment, we've laid it out. And obviously, we'll work to how we execute to that at the end of the day. Second part of your question, Chuck, was?

Just the composition of gross margins and SG&A in 2018.

Yes. Yes, I think as we look at it, gross margin, obviously, we look at the product margin itself to be positive as we go into 2018. And obviously, the pressure point is the freight. We look at markdowns to be an area again where we can continue to make some inroads and how we operate there. And again, that's more Family Dollar dominated than it is Dollar Tree, as you might imagine. So that's a piece of it. I think, otherwise, it will also help us to have distribution and occupancy costs. And you heard Gary say this, we'd look at the moving pieces of supply chain. While we know there's pressure on the transportation side, we know we need to get more productivity through our buildings. And so that will be one of the places we'll be looking to improve for the year as well. But as we look at our gross profit overall, there -- we're looking -- at the midpoint of the guidance, there will be some pressure on that of probably 20, 30 bps, basically. On the SG&A side, I think it's going to obviously come down to, again, how it kind of all looks at the end of the day from the standpoint of how we're able to drive sales and leverage it. And again, with the investment, there is some pressure there. So I think at the end of the day, we'll see a little bit more pressure on SG&A. And I would hope that we can drive some sales and leverage them a little bit better from that. I mean, that is part of -- to Gary's point, speaking to the reinvestment into the company is one of the things we're looking for to drive sales to help leverage the fixed costs as we go forward.

Chuck, let me just give my color on maybe a 40,000-foot level. But I think our merchants on both sides, we really see a sight line to exciting product both on imports. And I think continue to drive value with our domestic partners that ought to show up on our shelves in both banners. The pressure on the freight site, like I started off with, we're really going to work very hard to overcome this every way we know how to overcome what seems to be, and hopefully, is something that's a, this year issue. And we'll see. But at least it's upon us now and we're going to work hard on that. On the SG&A side, obviously, we are investing on the labor side and we're going to see the natural pressure. But we're investing in it to maybe get ahead of it. All I know for sure is that when I got good store managers and folks and field managers that are in stores driving the excitement, we do better. And that's really the downstroke we're making to get ahead of it. And I'm betting on our store teams to rise to the occasion and really drive the results that can help us overcome whatever's out there on the SG&A side. But part of it is just selling the right mix of product to help us on the freight side, too. So that's the plan as we go into '18.

Okay, that's helpful. Just want to follow-up -- would be, Gary, just to the first question on the call. It sounded like you were striking a little bit more of a cautious tone on the consumer and potentially your comp trends. I guess, is it right to interpret that way? Are you seeing anything over the past few weeks that has you more concerned today than maybe back in November when you provided 3Q?

No, I don't think I've -- I'm always concerned about our customers and how she's shopping. I think my reference point was on the tax credit refunds that are happening. They were pushed back about another week from last year. And so it's the 13th holiday we have at Family Dollar on top of the other 12 first-of-the-months. So we're at the beginning of that holiday really and that was my reference point in talking about the Family Dollar customer. On the Dollar Tree side, man, she's loving everything we're doing on the holidays right now. Kudos to our team. But the energy in the Dollar Tree stores really feels good and showing up on our seasonal holiday sales.

That is all the time we have for questions. At this time I would like to turn the call back over to Randy Guiler for any additional or closing comments.

Thank you for joining us on today's call, and especially for your interest in Dollar Tree. Our next quarterly earnings conference call to discuss Q1 results is scheduled for Thursday, May 31, 2018. Thank you.

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