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, Britney. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the fourth fiscal quarter and the fiscal year 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 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. As a reminder, the fourth quarter of fiscal 2017 was comprised of 14 weeks as part of our 53-week fiscal year. The extra week in 2017 contributed $406.6 million to sales and $0.21 to diluted EPS. In the fourth quarter of 2018, the company incurred several discrete charges, including a $2.73 billion noncash charge for goodwill impairment, a $40 million inventory markdown reserve related to the Family Dollar segment, a $13 million noncash impairment of certain store assets and a $1.5 million acceleration and noncash deferred financing charges associated with debt repayment. The fourth quarter of fiscal 2017 include the following discrete items: a $35 million recovery related to the Dollar Express settlement, a $12.6 million charge for an increase in the workers' comp reserve, and a $9.8 million acceleration in noncash deferred financing costs. These items are detailed in the reconciliation of non-GAAP financial measures in today's earnings release. Unless otherwise noted, our margin, net income and earnings comparisons presented today exclude the impact of these discrete items for the fourth quarter and fiscal year. At the end of the 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.

Thank you, Randy, and good morning, everyone. Sales for the fourth quarter were strong for both banners. Our results demonstrate the increasing strength of the Dollar Tree brand and accelerated progress on the Family Dollar turnaround as Family Dollar delivered its strongest quarterly same-store sales growth of the year. Our merchants at both banners have delivered a 2019 plan that we believe overcomes the effect of most tariffs at the 25% level and provides opportunity in the back half of the year if tariffs are not increased. In Q3, we had announced plans to renovate at least 1,000 Family Dollar stores in 2019. These renovated stores will include new price impact sections, including $1 Dollar Tree merchandise assortments. Approximately 200 Family Dollar stores will be rebannered to Dollar Tree. We accelerated our Family Dollar closings in Q4, closing 84 stores as we are aggressively optimizing our store fleet to gain traction towards our inflection points. We plan to close as many as 390 Family Dollar stores this year. Excluding the discrete charges, the combined company performed well for the quarter. Our results for the fourth quarter included sales that were $6.21 billion at the top end of our guidance range. Excluding the 14th week from the prior year's quarter, sales increased 4.2%. Consolidated same-store sales increased 2.4%, up from the 1% in Q3. And by segment, the Dollar Tree segment delivered a positive 3.2% comp, and Family Dollar same-store sales increased 1.4%. This was the strongest quarterly comp in 2018 for Family Dollar and on a 2-year stack basis, represented an acceleration of 130 basis points from Q3. On a GAAP basis, diluted loss per share was $9.66. On an adjusted basis, excluding the discrete items Randy outlined for Q4, diluted EPS was $1.93 within the high end of our…

Thank you, Gary, and good morning. Total sales for the fourth quarter were $6.21 billion, comprised of $3.31 billion at Dollar Tree and $2.90 billion at Family Dollar. Excluding the $406.6 million in sales from the 14th week in the prior year's quarter, sales increased 4.2%. Enterprise same-store sales increased 2.4% on a constant currency basis or 2.3% when adjusted for the impact of Canadian currency fluctuations. On a segment basis, same-store sales for the Dollar Tree segment increased 3.2% or 3.1% when adjusted for Canadian currency, and the Family Dollar's comp increased 1.4%. Overall gross profit for the quarter was $1.91 billion compared to $2.1 billion in the prior year's 14-week quarter. As a percent of sales, gross margin decreased to 30.8% compared to 33% in the prior year. Gross profit margin for the Dollar Tree segment was 37.1% for the fourth quarter, a 90 basis point decline compared with the prior year's fourth quarter. The decline as a percentage of sales was primarily due to 45 basis points of higher occupancy cost deleveraging from cycling the extra week in the prior year's quarter; 35 basis points of merchandise costs, including freight, as higher freight costs were partially offset by improved mark-on and a positive effect of product mix from strong seasonal merchandise sales; and 10 basis points of increased shrink. Gross profit margin for the Family Dollar segment was 23.6% during the fourth quarter compared with 27.6% in the comparable prior year period. The year-over-year decline was primarily due to markdowns, which increased approximately 210 basis points. This increase included a 140 basis point or $40 million reserve for SKU rationalization as well as increased promotional seasonal markdowns and lower mark gain allowances during the quarter. The merchandise costs, including freight, increased approximately 85 basis points, driven primarily…

Thanks, Kevin. Before I turn to Q&A, I'd like to highlight the continued progress we're making to Family Dollar. On the Q3 call, we shared an update on the integration process, our success in building a common foundation across the Dollar Tree and Family Dollar banners, and our development of the renovation model that is generating the returns we are looking for. We have since received very positive feedback from many investors, and we are confident we are on track to reach an inflection point as we continue to optimize the store fleet of Family Dollar throughout 2019. In addition to synergies, it's important to recognize the profound impact that Dollar Tree and Family Dollar brands have had on each other and the meaningful value this creates for our shareholders now and into the future. But the benefits from the merger have not just been for the Family Dollar brand. Dollar Tree has benefited, too. The stores we have rebannered from Family Dollar are performing well and have improved Dollar Tree's overall profitability, a trend that should continue as we rebanner more stores. And the Dollar Tree banner has also benefited from indirect procurement. We estimate we have saved more than $55 million. We've also used our scale of more than 15,000 combined stores to drive merchandise cost savings, exceeding $70 million. At Family Dollar, we've driven more than $145 million in estimated savings for indirect procurement and more than $100 million in cost of sales. In particular, as a result of our scale, we have decreased Family Dollar's initial merchandise costs by approximately 153 basis points since 2015. The lower merchandise costs have allowed us to partially offset higher distribution costs, shrink, and higher freight and fuel costs. Overall, at Family Dollar, we have taken the savings and reinvested…

[Operator Instructions] Our first question comes from John Heinbockel with Guggenheim Securities.

So, Gary, obviously, '19, we just started here. But when you think about your '20 sort of outlook, that does not include buyback, correct? And it is based off of the $4.85 billion to $5.25 billion guidance as we sit today. Is that correct?

That's right, John. With the emphasis being around -- we talked about this being a first half, second half of '19. And really, because of the investment of what we have to do on the rebanners, close the stores in the first half, get the H2 renovations going. We want to give a little color on our confidence in the plan, then trajectory, you'll see in the back half. And to complete the painting of that picture, we want to give some sense of what we expect on guidance as we look as far on to '20. And exactly to your point, it includes that coming off of our guidance that we gave this morning, the $4.85 billion to $5.25 billion.

And as a follow-up to that, the -- do you look at '20 and maybe even beyond, significant recovery at Family Dollar? Or are we sort of implying high single digit, maybe a little better EBIT growth at Dollar Tree?

Well, Dollar Tree, of course, is performing at a high level. So we continue to see the Dollar Tree leverage being -- it's always about our top line, our margins. We've -- even in this year, you take the backdrop of both tariffs and freight, we've been able to manage through this year, I think, a kind of level that I'm proud of our team. It delivers to the bottom line as we drive more footsteps into our stores. So Dollar Tree is always about driving more footsteps and to drive the top line comp. And that delivers the four-wall EBIT that drives down to the enterprise. But Family Dollar's recovery is exactly what we've described, the first half and second half trajectory, with the second half picking up steam. And as I would call out, that we will continue to plan on doing additional H2 renovations into '20 and beyond to get to the inflection point that we see, which is changing this fleet of stores, one store at a time. So it's a combination of Dollar Tree firing on all cylinders like we have been. And we are going to change the trajectory of Family Dollar stores at the renovation program and the other initiatives that we called out, too, that speak to some of the assortment in adult beverage and the other categories.

Our next question comes from Karen Short with Barclays.

Just want to ask a little bit about Family Dollar H2. I mean, obviously, you are very committed to fixing the business. So what obviously matters to everyone on this call is what the EBITDA margins profile could look like going forward. So can you maybe talk a little bit about what you're seeing in terms of the H2 EBITDA margin profile as a start?

Karen, this is Kevin. As we look at it, obviously, the points we've given you today are really about the top line growth. And as you heard Gary talk about the fact that we're seeing lifts in these stores of over -- of, on average, 10%. And then, obviously, then it's -- it really relates back to what does that drive. And it's going to drive a better operating income. It's going to drive a better EBITDA margin at the end of the day. We haven't really given any metrics around that. Everything we've built in, again, is built into our guidance. And again, you got to remember, at this point in time, it's about investments, especially in the first half, as we talked about the fact that the costs are front-end loaded with 75% being occurred within the first 2 quarters. And in particular, Q2 will be affected more than in Q1 just based upon the number of projects and the pace of things, especially around if we look at other things beyond that, we look at store support center consolidation as well as store closures. So a lot of those things will be happening, be affected in the second quarter. As we go forward, though, obviously, there is an expectation from an EBITDA margin to grow in the Family Dollar business. And again, get back to something of a more historical nature. And I don't think we've changed on -- in that manner, our thought process really from day 1 to just the new model, the new renovations, and driving that forward along with the other initiatives we've got going on.

Okay, and that's helpful. And then just on the tariffs. So obviously, your guidance assumes or reflects 25% implemented in March. So any way you could help give some color on what the actual impact is to earnings from that? And then, I guess the second part of that is, the 10% may not -- may be removed as well. So any way to think about how your numbers or guidance might change if 25% doesn't happen and 10% also gets removed?

So Karen, it's a good point. We are trying to follow the same progress everyone else does. But we built the plan assuming 25% was going to be in for the full year, and that's in our guidance. If 25% comes down, obviously, it says we're going to have some savings in the back half where we bought our product and as we went over in January of this year. I guess the way I think about it, is there upside? Yes. As always, we're going to manage in real time because it's all about footsteps at both banners, what do we need to invest in the right product at Dollar Tree, what's the right retails potentially at Family Dollar. We went into this knowing that this year was a potential of $100 million at Dollar Tree as a potential of tariff impact and $40 million at Family Dollar. We mitigated most of that. I'd say most because when the 25% was announced, lots of items were already on the water. So some of that impact is in the first half versus what we were able to negotiate in the back half. That will all fall to the bottom line, but it gives us an opportunity to invest in the business as we see tariffs change from 25% to 10% or 10% to 0.

[Operator Instructions] Our next question comes from Scott Ciccarelli with RBC Capital Markets.

So, Kevin, you just talked about no real change in how you're thinking about Family Dollar's future profitability. But you guys also just took a $2.7 billion goodwill write-down. So I guess I'm just trying to reconcile those 2. And have there been any changes regarding the future profitability potential at Family Dollar?

Well, understand, Scott, that the goodwill impairment is a function of an accounting process at the end of the day and it's at a point in time. And so as we've looked at our strategic and operational plans going forward and really built this plan around all the initiatives that we've spoken about this morning, those things will have the effect of improving the business. But at this point in time, as you look at it and you kind of create the new baseline, which was really this year -- 2018's financial results, you do a calculation based at that point in time or as needed. So I don't think that -- from my perspective, that doesn't change our view of the future and the value that can be created with the Family Dollar segment. So that hasn't changed. And I guess really -- that's really my comment, that's what I said from the -- our view of the long-term position.

Got it. I understand. And hopefully just a housekeeping item. Is there any assumption built into your earnings guidance for the multi-price point test at Dollar Tree?

Scott, Gary. No, it's not -- listen, we wanted to give you a sense of how we think about our testing. And as a management team, you've heard us in the past talking about some of them. Others never made the light of day, but listen, this is something that we are going to be very smart about. We have some insights from our past tests that we've done. But there's nothing in guidance. And listen, we'll report on it as we see it's something that we need to report on.

[Operator Instructions] Our next question comes from Chuck Grom with Gordon Haskett.

I was wondering if you guys can just discuss the improvement at the Family Dollar segment here in the fourth quarter and, I guess, your confidence in the sustainability of that. And the reason I ask is over the past couple of years, you've had some good quarters at Family Dollar, some softer quarters. Just curious, your confidence in the improvement. And then as a follow-up to that, Gary, just on the decision to test the multi-price points. How extensive is that going to be? Is there -- is it the number of SKUs you're going to be testing? Is it going to be measured by the number of stores? And then just ultimately, just why now? Why the decision to do it?

Sure. Look -- listen, we had a good Q4 at both banners, Dollar Tree and Family Dollar, with the comp. The confidence in the business, listen, we've renovated 585 stores last year, as we've said before. Only 200 and change of those were the H2s. What the H2 has changed is really the footsteps into those stores. And that's why it gives us confidence in the model across the demographics, locations, competitive sets, the ability -- well, our technology has allowed us to do now to be able to put Dollar Tree product easily into the Family Dollar stores. That's what gives me confidence. But the comp for the fourth quarter was really all boats rising. It's the things that we're doing every day at Family Dollar to drive the business. So it was a good Q4. And what I was pleased with was the important December time frame where we invested in categories, toys, like a lot of folks did. We had a strong toy category season. The consumables, which we've always talked about, being the bellwether of what we try to track on what our customers need most, are doing well. So what's ahead of us are more H2s. And it changes the foot traffic because it's more of what our customers need across the categories. And while the previous renovated stores are doing okay, what the H2 stores deliver are higher footsteps, a modest increase in basket. But it's really about our customers coming in and gaining -- shopping more of the aisles and then -- and seeing more of the categories and more of the dollar price points, and along with some of what we're doing with the WOW tables and queuing line. So it's a nice combination to drive in the customer with what she…

Our next question comes from Paul Trussell with Deutsche Bank.

I wanted to first ask maybe for a little bit more color on the guidance, maybe particularly as we look at the first quarter. Could you help us better understand what you are assuming from a SNAP headwind, given the pull-forward in timing along with assumptions around the initiative-related costs? Should we see continued markdowns, deleverage on occupancy? Just maybe hold our hands a bit more there, Kevin.

Paul, as we work through the plan and put our guidance together, again, the biggest differential year-over-year is obviously the initiatives and the pace of initiatives and the costs, not just the number of projects, but as we've said, we now have the store closures as well as the store consolidate -- or the store support center consolidation. So those costs as well. As we've said, the costs that we called out, really 75% being incurred in the first half roughly as we look at it today. And again, I would tell you, of that, it's really a 1/3, 2/3 type of situation between the first quarter and the second quarter because, as I said, second quarter gets impacted much more, it's just based upon the timing of various aspects of that. And so what do you see? You do see -- basically, you do see the effect of some additional markdowns as we go through the renovations, right? We basically have to move some inventory. There's things -- some things that we discontinue to make room for the $1 products. So to your point, markdowns will continue to be a big piece of that. The other thing you see from a cost perspective is labor. The other piece of this is we have to have teams that go across the company and do these resets. And so they have that as well as their travel and things like that. So those are a couple of the big buckets of costs. And so I think that's important. And then, obviously, this past year, we had the reinvestment in labor again. So that was a -- we'll call that a onetime investment. But again, as we know, the states continue to increase their minimum wage, so we'll see some pressure from that as well. As far as SNAP, we did see a benefit in January from the movement of February SNAP to about January 20. I think we -- our calculation would tell you is was about a 30 basis point -- roughly a 30 basis point benefit to the quarter for Family Dollar. And I think that's pretty much in line with what you've heard probably from some other retailers as well. But again, I think what our viewpoint is, is we'll go forward. And we got a late Easter, which we think that is beneficial. It's a little more beneficial typically to Dollar Tree than Family Dollar. But it is typically a good time frame when we get that late Easter and get that warmer weather and get people into the stores and kind of broaden the product that's there for them to look at. So those are just some of the backgrounds, some of the color we've got going on in Q1, Q2 as we go forward.

And my quick follow-up is just around store plans. You have an aggressive plan in place, around 1,000 -- at least 1,000 remodels this year. But you mentioned in the press release that, that might accelerate further over the following years. So maybe just touch base on how we should think about what percent of the total fleet could ultimately get this remodel. And how does that impact your thought process around opening up new doors and still being a square footage growth story?

Paul, Gary. I think you're exactly right. We called in 1,000 in the cadence this year. And why the impact is in the first half, I want to get these things done no later than somewhere in Q3. And if we can end up doing more of them, we'll try to do that. But the 1,000 is based on us getting it done primarily in the first half -- it'll go into Q3, but we need to get more stores behind us. And I would -- we're not ready to call on capital next year, but it's -- certainly, I can see 1,000 next year as well. We are touching a lot of stores, not just Family Dollar, but Dollar Tree stores, too, which we haven't talked much about. But with our Snack Zone delivering a nice comp in the stores that we're putting that in, we're touching 1,000 Dollar Tree stores, too, to drive top line business and bottom line performance. So we have a lot of human capital extended this year. And my sense as we go into the out-years, we'll start to ramp up store count at Family Dollar because we're going to like this H2 and not just because of performance, it will also help what we do on our comps as we get more new stores behind us. So I would see -- not ready to declare '20, but I would say it's going to be a similar renovation count. And I'm going to see some additional new stores as we look out into '20 to say how we -- that's the growth factor in places our Family Dollar stores perhaps have been most challenged. And let's put an H2 store in some of the greenfield areas that we can grow the business. So this is a business that we have -- we're focused on. We're going to fix it and we're going to grow it. And that's what this initiative is all about.

Our last question comes from Kelly Bania with BMO Capital.

First, I just wanted to ask on the cost of the H2 remodels. I believe the prior remodels were around $100,000 and $150,000. I'm wondering if that's gone up with the incremental lift there. And then just had another follow-up as well.

Yes. The cost, again, I think we spoke to this last quarter, it really kind of ranges between $100,000 to $150,000. And again, the variables affecting that are the number of freezer coolers we may be adding as well as, in some cases, if it's an older store, there may be some deferred maintenance that we're also addressing as well as we go through the process. So that's still our general range on a cost basis.

Perfect. And then just another one, I guess, on the multi-price point test. Maybe just can you remind us what you have found in the past as you have tested these, what you did and didn't like and what you're specifically looking for this time? And how long you expect to do this test?

Kelly, you're probably asking more than I can answer. But I would say what we saw in both Oops and Dollar Tree -- remember, Deals was a single-price point banner, and then we converted it to some multi-price. And in fact, we took some Dollar Trees along the way and added that to a Dollar-Tree-Deals format. So what's the takeaway? Our customers are very loyal to what Dollar Tree represents, we all know that. It's a brand. It's not just price and item. It's a brand that they can count on as they walk through the door. And so between what we marketed, how we showed it in-store, the categories that we put it in, how our customers shop, different categories and adjacencies, those are all the things that we captured with the other tests that gave us insight. And as we go into this, we take some of those learnings just to say, "Let's be as smart as we can in what we're trying to achieve in terms of success." And I can't put a time line on it for you. I mean, this is a test and learn. You do something, you tweak it, and you change it. So those -- that's just been really the discipline we bring to, to make sure we understand what is it we're doing, what's our customers seeing. And quite frankly, the customer research. At the end of the day, it tells us what our customer sees on this. So more to come. I'm just not -- we'll go into this with the eyes wide open, based on what we've done in the past, and do it in a very disciplined, logical way.

Thank you, everyone. This concludes today's question-and-answer session. I will now turn the conference back over to Mr. Randy Guiler.

Thank you, Britney. And thank you for joining us for today's call and for your continued interest in Dollar Tree and Family Dollar. Our next quarterly earnings conference call to discuss Q1 results is tentatively scheduled for Thursday, May 30, 2019. Thank you, and have a good day.

Thank you, everyone. This concludes today's teleconference. You may now disconnect.