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

Thank you, Jonathan. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the first fiscal quarter of 2018. Participating on today's call will be our President and CEO, Gary Philbin; and our CFO, Kevin Wampler. Before we begin, I would like to remind everyone that various remarks that we will make about future expectations, plans and prospects for the company constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. These are included in our most recent press release, most recent 8-K, 10-Q and annual report, which are on file with the SEC. We have no obligation to update our forward-looking statements and you should not expect us to do so. At the end of our prepared remarks, we will open the call to your questions. [Operator Instructions] Now I will turn the call over to Gary Philbin, Dollar Tree's President and Chief Executive Officer.

Thanks, Randy. Good morning, everyone. Thanks for your patience. This morning, we announced our results for our first quarter of fiscal 2018. Sales increased 5% to $5.55 billion. Our consolidated same-store sales increased 1.4%. By segment, comp sales for the Dollar Tree banner increased 4%, and for the Family Dollar banner, comp sales decreased 1.1%. Our enterprise gross margin rate declined 20 basis points to 30.6%. Operating income increased 12.6% to $437.6 million. And excluding costs associated with our recent refinancing and the prior year's $50.9 million receivable impairment, adjusted earnings per share increased 21.4% to $1.19. Our teams in both banners worked hard to deliver top line sales and bottom line results that were within our guidance range for the quarter when adjusted for the debt refinancing. We started the year knowing we needed to overcome an early Easter. Our teams faced some significant hurdles and freight cost pressure above our initial estimates in the quarter and the disruption of business, especially at Family Dollar, from a wetter and colder-than-expected spring. Faced with these issues, I'm proud of our banners and teams' efforts to overcome these hurdles. By our business segments, for Dollar Tree, we had a positive quarter of 4% comp, now the fourth consecutive quarter of comps greater than 3.5%. Family Dollar comps, while negative, had positive consumable comps, now the sixth consecutive quarter of positive comps for the consumables side of our business. Our Dollar Tree Canada team exceeded its plan for operating income, driven by improved margins and expense leverage. And our Dollar Tree Direct online business delivered double-digit comp increases in both sales and site visits. In our Dollar Tree banner, for the first quarter, our top-performing categories were candy, snacks and beverage, beauty and eyewear, health and personal care, and household consumables. Our…

Thanks, Gary, and good morning. Total sales for the first quarter grew 5% to $5.55 billion, within our guidance range of $5.53 billion to $5.63 billion. Dollar Tree segment total sales increased 8.3% to $2.78 billion, and Family Dollar segment total sales increased 2% to $2.77 billion. Enterprise same-store sales increased 1.4%. On a segment basis, same-store sales for the Dollar Tree banner increased 4% or 4.1% when adjusted for Canadian currency fluctuations, and the Family Dollar banner decreased 1.1%. Overall gross profit increased 4.5% to $1.7 billion for the first quarter of 2018 compared to the prior year's quarter. As a percent of sales, gross profit margin declined 20 basis points to 30.6% versus 30.8% in the prior year's quarter. Gross profit margin for the Dollar Tree segment was 34.5% for the first quarter, a 40 basis point decline compared with the prior year's first quarter. Factors impacting the segment's gross margin performance during the quarter included: shrink costs, which increased 30 basis points; merchandise costs, including freight, increased 20 basis points due to higher freight costs, partially offset by increased sales of higher-margin variety items; distribution costs increased 15 basis points, primarily from higher distribution center payroll costs; and these were partially offset by occupancy costs, which decreased 20 basis points, resulting from leverage from the comparable store sales increase in the quarter. Gross profit margin for the Family Dollar segment was 26.7% during the first quarter compared with 26.9% in the comparable prior year period. The 20 basis point decline was primarily due to occupancy costs, which increased 45 basis points due to loss of leverage from the decrease in comparable store sales; shrink costs, which increased 30 basis points; and distribution costs increased 10 basis points due to higher distribution center payroll costs. These were partially…

Thank you, Kevin. We continue to focus on and make meaningful progress to grow and improve our business for both banners. And now we are well positioned in the most attractive sector of retail to deliver continued growth and increase value for our long-term shareholders. The combination of nearly 15,000 Dollar Tree and Family Dollar Stores provides us the opportunity to serve more customers in all types of markets. This combination of these 2 great brands provides great flexibility in managing our future. Now to the timing shift of the holiday and colder-than-normal spring weather behind us, we have seen a pickup in sales trends at both Dollar Tree and Family Dollar in May. Still early in the quarter, but it's gotten off to a positive start for both banners, and I'm pleased with the kickoff to the summer season. We expect to continue to see pressure on freight costs, both inbound and outbound, for the foreseeable future. We are taking action to minimize the impacts of these costs. Also, we are seeing diesel costs run higher than a year ago and higher than we had planned. Both of these cost pressures are included in the outlook. Our ocean freight rates negotiated in April came in lower than originally planned. We should see the -- we should begin to see the benefits of the lower-than-anticipated rates in the back half of the year. This was also contemplated in our updated outlook. As we detailed last quarter, we are investing in our business with more labor hours in the stores, more competitive wages and benefits and in-store standards. We are investing in these specific areas because we believe they will drive our business and create a better opportunity for our stores. I'm counting on our teams to be able to drive a better experience and more sales. Our Q1 performance was a bit of 2 stories. The Dollar Tree segment, strong, resilient, relevant, bounced back after the weather and planned for and overcame in early Easter. I was really pleased with all of our teams' efforts and achievement. Family Dollar was impacted particularly hard by weather in 2 of our seasonal assortments in the spring: apparel and lawn and garden. In comparison, Family Dollar consumables business comped positive in Q1. I'm pleased with the results and efforts we are making in rebuilding our brand and relevance to our customer around a better shopping experience, greater value and convenience, as demonstrated by Family Dollar's good start to the second quarter. As we move into the summer season, our store field teams, merchants and support teams are focused on our initiatives and the basics to deliver our banner and company goals. Operator, we're now ready for questions.

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

I guess, Gary, on the Family Dollar front, how best to think about same-store sales in the quarter maybe versus your internal plan? And if we took a multi-year view here, is there anything structural that you've identified with the concept that changes the way that you look at the productivity opportunity today and maybe how you did -- versus how you did a year or 2 ago?

I don't think so. I think we're still -- Matt, we're still building the business. It's obviously fragile. So I think for this low customer -- low-income customer that we serve in particular areas at Family Dollar, when we do get disruption, which we could point to some of the weather impacts, our customer just doesn't buy some of the categories that I pointed out until she really needs it. And so when I take a look at Q1, part of it just being the fact that it was the weather, I think there's nothing structurally. We see the renovations continuing to make progress as we change what the customer sees and the fleet of stores. We continue to see private brands drive our business when we change the labels and introduce them to our stores. And we're going to continue to invest in stores. And that's a little bit of labor. It's going to be the capital that we invest. That's going to be the long-term structural change. I think what -- if I take a look at Q1 to Q2 and I can point to the things that impacted our sales across those categories, hey, now that's warm -- guess what, the warmer weather items are selling like we thought and they had the swing from what we saw in Q1 to driving some of the comps -- positive comps that we're seeing at the start of Q2. So it's -- to me, it's -- everything we talked to you at the beginning, whether the fundamentals are going to drive our customer value, let's get our pricing right. That's everything that Smart Ways to Save brings to the party across our store, from being EDLP to private brand to $1 Wow that's improved the store experience, and some of that's going to be capital with changing the fleet. And at the end of the day, it's going to be investing in our store folks so we can run great stores in all 8,000-plus Family Dollars.

Great. And then, Kevin, on gross margin at the Family Dollar concept, aside from the sales-related occupancy you leveraged this quarter, which is -- if that makes sense, can you just walk through any differences versus your plan on the gross margin front at Family Dollar and how best to think about this line item and drivers as the year progresses?

Yes, Matt. I think, obviously, the other big callout is shrink really for both banners. But as I noted in our prepared remarks, both banners were affected by approximately 30 basis points negatively in gross margin [indiscernible], which is very significant, from our perspective. So we have to -- obviously, our teams are engaged and working to understand the issues. The one thing about shrink is once you see a trend, it does take a little while typically to reverse one of those trends. So that again plays into the way we think about going forward the rest of the year. So that's obviously a big game changer, from my perspective. The other thing is obviously, and we've spoken to freight, it's trended a little higher than what we spoke to at the beginning of the year, again, a lot of it being related to driver issues, which -- and then basically affects backhauls as well and the efficiencies we're able to gain or not gain from that. So those are the 2 areas that will probably be the callouts that I would say.

Our next question comes from Michael Lasser with UBS.

So when we look at the spread between Family Dollar same-store sales and Dollar General same-store sales that also reported this morning, that expanded to 320 basis points. And we have seen pretty steady expansion in that spread for the last couple of years now. And it's not a completely clean number, but it really is the only way that we have to benchmark the influence that the team's having over its own performance. So why do you think that spread is expanding and was larger in the first quarter than it's been at some time?

Michael, it's Gary. So let me take this one. I think everything we have our teams working on are going to be the fundamentals over the long term, change that dynamic. So it starts with the top line. Everything that we do to drive that ought to be showing up in comp store sales. I think in Q1 though, just for Family Dollar, where our customers are served in urban settings, it is my opinion their shopping habits, travel patterns get more disrupted, more -- perhaps more easily with some of the weather. And if you're low income, you don't buy at some of the segments that we have, apparel being the biggest one, that says, "When you buy short sleeve and dresses for Easter and when there's snow on the ground, it just doesn't work to the same way at a Family Dollar store." So yes, I sort of want to bucket Q1 into the things that we can sort of point to because we could see that -- the categories that were impacted by the weather. And when we compare year-over-year, the segments that were out there that should have been performing, you could say, "well, there's another winter storm." So that's a piece of it. I think structurally, longer term, it's still everything we've been talking about. We've got to continue to have renovated stores that will drive comps. Those are the elements that, behind comp store sales for any banner, at the end of the day, will help us drive comps. What they'll do is improve the adjacencies, get the right square footage in-store for the right departments. That's just the work that's out there that we have to do to improve comps structurally quarter-over-quarter. So Q1 is what it is. We've cinched our belts up…

And presumably, a piece of the equation with Family Dollar is a lower penetration of the coolers and freezers, some of the consumable products that drive traffic. Do you have any plan to accelerate and really act with a greater amount of force to roll out more coolers and freezers to provide more consistency in the traffic of that business?

Well, I think we have a pretty aggressive project plan this year between both banners. We're going to be touching well over 1,000 projects. I think we are doing it in an accelerated fashion, both with the renovations, which are bigger projects at Family Dollar, along with the impact of additional doors, mainly around frozen food, exactly to your point. So that's in the hopper, and that's what we're continuing to work on for this year. So I think it's a key point. Our customer does rely on that category maybe more than others do because of what it does for both snacking and meal planning for her on different weeks of the months. So that's in the plans.

Our next question comes from Dan Wewer from Raymond James.

Kevin, I just wanted to confirm that I heard correctly the Family Dollar inventory was up 14% per square foot. Now if that's correct, it looks like the projected payback in revenue and gross profit dollars is minimal. I just want to see if you could explain that and then also if you think this significant inventory build is contributing to the higher shrink accrual of 30 basis points.

Yes, I mean, I think when we look at our inventory at Family Dollar, as we said, we have been consistently working to improve in-stock levels, especially first of the month, being ready for that key time to service that customer. And so that's always been something. As well as the fact that, as I mentioned, several category resets going on currently, which has elevated some levels of inventory for that. So the expectation would be as we go through the year, that will come back down. And then, as I pointed out, the other point being is we were actually down a year ago at this point in time, 4.2% on a selling square-foot basis as we were going through some of the changes. So all in all, I think inventories is where we'd expect it to be. The -- as far as shrink, I mean, obviously, when you have more inventory in the stores, that can have an effect on shrink. I don't know that I would specifically say that's probably going to shrink because, obviously, the shrink results are for -- are really for stores that are being inventoried since a year ago. And the inventory levels last year tended to be lower in general. So I don't know that that's exactly a cause, but it's something that we do keep our eye on because it can be an effect in the longer term.

Dan, I would just add my color to it. We did several measured tests in our Family Dollar Stores. And listen, our customer research at the beginning of this said our customers are disappointed with out-of-stocks. And that's a function of supply chain. Sometimes it's a function of the replenishment we put into the store. We wanted and aimed for specific categories to get [ meatier ] on the shelf. And so we're going to run year-over-year a higher inventory level. Q1 also reflects some of the items that are in place to try to minimize the out-of-stocks as we do resets, so rather than linger, get the product in the store and that's part of what's driving up inventory, too. But I think your last point is a real one. I mean, I would just tell you, if I put my operator hat on, yes, I think we've got to bring down some of the inventory levels across some of the categories, and that ought to help shrink. The thing with shrink is you have a couple of good years or 3 good years, and people -- it's not that they take their eye off the ball, but it becomes a priority further down their checklist. And we've got to get it right back underneath sales and people development at both banners, quite frankly, as the things that we monitor on a weekly, monthly basis.

Gary, just as a quick follow-up. Smart Ways to Save has -- plays a big focus on private label, digital coupons, better endcaps, et cetera. Do you think we're now at the point where you need to get more aggressive in pricing for branded consumables in the Family Dollar segment to help bridge that sales deficiency?

Well, I would tell you that we had some pretty good comps across some of the national brand categories and brands for Q1 despite the overall comp being down. There's never one arrow in the quiver. I think, to me, it's -- our customers thrive and then survive at the end of the month many times, our lowest-income customer. I think we can trade her up when she has some money in her pocket. But we can't stray too far promoting opening price point, and that's really what Smart Ways to Save was to basically put an umbrella over that says, "There's a number of ways to entice this customer." You're right. We have to be right on everyday pricing, and everything that we see shows us more competitive than last year at the same time. I think the merchant team has done a nice job getting us some line on some of the right assortment. I think the private brands show our customer even greater savings. And our Smart Ways to Save is giving us some market intelligence to our customer when she buys one from first of the month to the end of the month. So it's an umbrella for how we're going to go after this whole approach, knowing our customer better, buying brands, enticing with private label. And $1 Wow is going to be part of our DNA. Obviously, it's been at Family Dollar, we can certainly help it with our Dollar Tree business.

Our next question comes from Paul Trussell with Deutsche Bank.

I'm just going to circle back to the top line questions asked and try to approach it just slightly differently. Gary, what do you calculate the impact of weather to the 1Q comp to be for the Family Dollar and Dollar Tree banners? And are you suggesting that the headwind to Family Dollar was significantly greater than Dollar Tree? And then just to confirm, the Family Dollar comps, are they positive quarter-to-date? I think that's what you mentioned. And just want to know how you're thinking about at Deals and Dollar Tree's top line over the balance of the year. And I guess, at the crux of that last part of the question is, has your outlook on the health or the spending power of your core customer changed at all?

Yes, comps are positive as we go throughout the quarter; let me start with that. And the weather does impact Family Dollar more around those 2 big categories I mentioned. I mean, Dollar Tree doesn't have an apparel department, really. It's a bigger category, obviously, at Family Dollar. And lawn and garden at Family Dollar is everything that we sell in charcoal and grills and what people buy when the weather gets nice. We have a different market, a different customer segment and we're going to have different product at Dollar Tree. I think it's, quite frankly, remarkable that Dollar Tree team, merchants, operators, field teams -- I mean, a 4 comp with an early Easter and knowing what we are faced with snow on the ground in March, I mean, really, my hat's off to the team. It's one thing to plan it, but the team executed that, and I was really pleased. And Family Dollar, for all those reasons, part of it being our customer. If you don't have a car, your bus line gets disrupted, you're shopping differently. So I would say that's the things that I'd point to for our customer. And I don't know how to think about the health of our customer. If we're -- I think our customer maybe tends to be impacted more by apartment rents, which we've seen go up more. Fuel is up, but lots of our customers are riding buses to work and to stores, obviously. And we're all still about the cars like anybody else out in that part of the world. But I'd sort of point to this customer, when she has money and we have the right offering, we've seen her respond. And that's the difference between the banners. I think -- how do we overcome…

And what synergies, if any, are you still taking advantage of and see flow in through the P&L this year? And what are your updated thoughts on Family Dollar's EBIT margin potential and the timetable and the comp needed to get there?

Well, let me tell the synergies was the kickoff around really the big buckets were identical, similar match on items; it was the rebanners, so Family Dollars to the Dollar Trees; it was going after our indirect product; and a smaller portion was around logistics, at least that we've been able to take advantage of, one DC that's now co-bannered. So as we've kicked this off and worked through that, those elements are in our P&Ls for both banners as we march forward. It doesn't mean we don't stop taking auctions together or finding opportunities to get costs down in the system. But really, we get one bite at the apple of our synergy number. And so the teams work together now to leverage vendors, to find the right vendors, to find people that need capacity to go to market on the merchandise side; same on indirect. And rebanners, while we're going to do a sprinkling of them this year, that will be more opportunistic. I think to go back to your question, we said we ought to be able to get back to historical levels. And we've got to be able to do that by driving that top line sales number. And to me, the underpinnings of that are going to be renovations, new stores. Yes, we're doing about 300 new stores a year. I think, ultimately, you want a bigger number of Family Dollar Stores coming out of the pike than that. So as we slowed it down to make the -- do the needed work we needed to on adjacencies and work, and that's part of our renovation, that's how a new Family Dollar opens up now, as that fleet changes, that will give us some stability and top line comps over time. The work that's going to go on, on the merchandising side won't stop. But it's going to be underneath the umbrella of Smart Ways to Save on the elements that we've been talking about this morning. So there's still the path there, the things that we signed up for at the beginning are still there. It's -- but to get there, we do have to invest in the facilities and the stores, our people, too, and keep driving the incredible values that we need for our customers to give them a reason to come into a Family Dollar at the beginning of the month and the end of the month.

Our next question comes from Scot Ciccarelli with RBC Capital Markets.

Scot Ciccarelli. I guess, this is a little bit of a follow-on to Paul's question. According to your proxy, you guys have already exceeded your synergy targets. And so I guess, if I could -- if you could provide just a little bit more color, Gary, in terms of what you're talking about, are there still more costs to extract with Family Dollar with the way you guys kind of thought about synergies? Or is it -- as you started to -- I think started to imply, you really need to generate sales growth and natural leverage to drive significant bottom line improvements to Family Dollar. Just what's the right way to think about it, costs coming out? Or is it kind of natural leverage and we've got to get the top line to generate that?

Well, Scot, I think, as we think about it, it starts -- it always starts with driving top line, for sure. But we always have been a very cost-conscious business. And to your point on the synergy, we stated from day 1 the expectation of achieving $300 million of run rate synergies at the end of 3 years. To your point, in the proxy, we did note that it's been certified that we had a long-term performance plan related to $450 million that have been achieved. As part of that, we reinvested some of those dollars, as we went along as well, to improve the business and move it forward as you would think we would. We had some significant success in the areas of indirect spend, cost of goods sold and banner optimization exceeding our targets in those areas. And so that was very good. But so now we're really about 30 days away from hitting that 3-year mark, and we're really transitioning from what we would call synergy initiatives to really what we would really call our normal process as it relates to cost savings and process improvement that have been a long part of our performance-based culture here at Dollar Tree. So I think those types of things, to Gary's point, will continue. We'll continue to work on various processes and cost initiatives. We're not just going to speak to synergies anymore. That's kind of run its course at this point in time. And -- but to your point, those things will continue. It's very important to us. But we do really need to drive top line to get where we'd like to get from -- in the long term with our margin.

Our next question comes from John Heinbockel with Guggenheim.

So Gary, 2 things, maybe related or probably not. If you think about -- how would you assess store conditions at Family Dollar today? Obviously, in-stock is most important, but just overall shopability. How do you assess that? Where do you think, with the investments you're making in labor, how much improvement do you think you can achieve here as we head out maybe into 2019? And then secondarily, the shrink at Dollar Tree, where is that coming from, be it product category or process or bucket? And I guess that would be with us for a while, right, until you do more physicals.

Well, let me start with the store conditions at Family Dollar. They've improved, and I would give our store teams and field teams credit. Are we fragile? Are we perfect? No, we still have a ways to go. And it's a little -- we run our stores with sometimes minimum coverage. And so a truck gets late or the bus shows up with customers, we could be at risk. But I think the fundamentals that we're building around how do we think about building a schedule, the work to be done, and it sort of speaks to your second question then, where do you invest in a Family Dollar on the labor side? This isn't rocket science. It's about getting our stores stocked. It's getting them phased out and recovered and it's taking care of customers, primarily. And it's -- how do we drive each of those buckets to the maximum efficiency. So on our investment, we're not trying to peanut butter every store everywhere. We're really trying to invest in the stores that we see upside because of sales trends, our opportunity to invest in labor, specifically around those categories, to drive the difference. Now beyond that, the facilities along the way, we made an investment, too: cleaner floors, not deferring maintenance, getting our hands around all the things that work against our own best interests sometimes when we do that. So we've always tried to manage in real time, but we've also tried to say, over the long run, what is it you need for customers who ought to have a better shopping experience? So those are some of the elements the team at Family Dollar have been working on. There's upside with the right investment and store labor, both Dollar Tree and Family Dollar. At Dollar Tree,…

We have time for one more question from Chuck Grom with Gordon Haskett.

Just a couple of questions here on the guidance, Kevin, kind of following up on Paul's earlier. Just want to see if you guys are still comfortable with positive comps in the remainder of the year across both banners. And then on the gross margin line, I think, back in March, you said down 20 to 30 basis points. Wonder if you could update that line item for us.

Yes, I think, obviously, as we give guidance on an enterprise basis as it relates our comps that we set, low single-digit comps, so we're obviously comfortable with that. As it relates to gross margin, I think there probably is a little more pressure than what we had initially said. Obviously, the -- with the fact that shrink as well as freight are obviously up in the gross margin category and given what we've seen there, what we've talked about today, there'll be a little bit more pressure within that line item going forward.

Okay. And just on the weather issue -- sorry, another crack at it. A number of retailers have sort of backed that out or tried to back it out. Just wondering if the first quarter seasonal business, apparel business had trended similar to what you're seeing today, any sense for what Family Dollar would have comped in the first quarter.

Well, I don't know. It's a game of what-ifs. But I know it's a big enough impact on Q1 that it was -- it's part of why we had a negative comp. I mean, that and lawn and garden, I can almost put a fence around and say, "Those were the issues." So -- and I think, when it gets warm, it pops, as it should. And I think that's -- it tells me we got some of the right things out in store and our customer is responding because she does need them now, short sleeves and shorts too. I went back to some of our weeks when -- in March, your -- some of your better categories are long-sleeved hoodies and tops, that's not a good thing for April. So I think we saw that switch now as we got into May and with the traditional shopping patterns.

Okay. And then just one last one, just bigger picture. Obviously, before you acquired Family Dollar, there was a number of issues, some of which were price, some of it was execution and then a lot of people thought it was real estate. You've done a really good job on price. I think table stake initiatives, based on our checks, look great, which kind of leaves real estate as the problem. I'm wondering -- I don't want to look at first quarter and run with it too far. But do you think there's a real estate problem with the FDO segment? And if so, how do you address that and the time line to address it?

I wouldn't say a problem. I think the opportunity that we saw going in was there's a number of different store formats out there that don't give the right square footage at the right department, which is what part of their renovation program does. And over time, it's a fleet of stores that some stores come up every year on lease renewals. So while it's a bit about the pieces are on the chessboard, over time, we can take advantage of where we think we ought to be and perform the best. But I would say, I don't know how to put a proportion to it. Probably it's going to be getting the opportunity to put stores where we want them with the new-store program. They'll be closing down stores that aren't performing for whatever reason. But I think the more exciting part of the business and the reason we did this was an opportunity to drive renovations in the new stores where we want. That's the top side and really where we see the opportunity for Family Dollar. So all those other things you talked about, yes. Get the pricing right, get the execution better in store, let's invest in the stores. Over time, those are the things in retail that tend to come back and drive store performance. So we're not taking our sights off those important elements as we go forward.

I would now like to turn the conference over to Mr. Randy Guiler for closing remarks.

Thank you, Jonathan, and thank you for joining us for today's call, especially for your continued interest in Dollar Tree. Our next quarterly earnings conference call to discuss Q2 results is scheduled for Thursday, August 30, 2018. Have a good day.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.