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Edited Transcript of DLTR earnings conference call or presentation 1-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Dollar Tree Inc Earnings Call

CHESAPEAKE Mar 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Dollar Tree Inc earnings conference call or presentation Wednesday, March 1, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Randy Guiler

Dollar Tree, Inc. - VP of IR

* Bob Sasser

Dollar Tree, Inc. - CEO

* Gary Philbin

Dollar Tree, Inc. - Enterprise President

* Kevin Wampler

Dollar Tree, Inc. - CFO

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Conference Call Participants

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* Matthew Boss

JPMorgan - Analyst

* Karen Short

Barclays Capital - Analyst

* Scot Ciccarelli

RBC Capital Markets - Analyst

* Brad Thomas

KeyBanc Capital Markets - Analyst

* Paul Trussell

Deutsche Bank - Analyst

* Dan Binder

Jefferies LLC - Analyst

* Dan Wewer

Raymond James & Associates, Inc. - Analyst

* Laura Champine

Roe Equity Research - Analyst

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Presentation

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Operator [1]

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

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Randy Guiler, Dollar Tree, Inc. - VP of IR [2]

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Thank you, Melanie. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the fourth quarter and FY16. Participating on today's call will be our CEO Bob Sasser, our CFO Kevin Wampler, and our Enterprise President 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 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 questions. Please limit your questions to one, and one follow-up question if necessary. Now I will turn the call over to Bob Sasser, Dollar Tree's Chief Executive Officer.

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Bob Sasser, Dollar Tree, Inc. - CEO [3]

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Thanks, Randy, and good morning, everyone. As you know, this morning we announced our results for the fourth quarter and full year FY16. Enterprise total sales for the fourth quarter increased 5% to $5.64 billion. Same-store sales, which now includes our Family Dollar segment, on a constant-currency basis increased 1.2%. Adjusted for the impact of Canadian currency fluctuations, the same-store sales increase was 1.3%.

By segment, same-store sales for the Dollar Tree banner increased 2.3%, or 2.4% when adjusted for Canadian currency fluctuations. For the Family Dollar banner, same-store sales increased 0.2%. Our gross margin rate improved 130 basis points to 32.1%. We leveraged our total SG&A expense by 30 basis points. Operating income increased 24.9% to $586.5 billion, and our year-over-year operating margin for the quarter improved from 8.8% to 10.4%.

Net income for the quarter increased 40.5% to $321.8 million, and our earnings per share were $1.36. This represents a 40.2% improvement from the fourth quarter a year ago, and exceeded the high end of our guidance range by $0.03 per share.

This was a very solid quarter across both banners. Total sales were near the mid-point of our range of guidance. Same-store sales were positive in both Dollar Tree and in Family Dollar. Gross margin rate and the operating margin rates improved, and SG&A expenses across both banners were well managed. Operating margin improved 160 basis points to 10.4% for the quarter, and importantly, our EPS exceeded the top end of our range of guidance.

We are pleased with our progress on the integration of our Family Dollar business, and we remain on track to deliver at least $300 million in run-rate synergies by the end of the third year post-acquisition. There's still much more to be done, and we continue to believe we will ultimately surpass our three-year target.

Our strategy remains unchanged -- to deliver great values and convenience to our shoppers every day. With the combination of our complementary brands, Dollar Tree and Family Dollar, we have unparalleled opportunity in value retail to serve more customers in all markets. We believe we are in the most attractive sector in retail. Shoppers today are increasingly focused on value and convenience, and that's exactly what Dollar Tree and Family Dollar stores provide, value and convenience.

Looking forward, our banners are positioned for increased relevance to our customers, sustained growth, and improved profitability. We have multiple opportunities to continue growing and improving our business. We're opening more stores. In FY16, we opened 584 new stores, and in FY17, our plans include opening 650 new stores.

Additionally, we are keenly focused on increasing the productivity of all of our stores. We see continued opportunity to increase sales, improve gross margin, and better manage the cost structure within each of our banners through our continued focus on the customer, our drive to business initiatives, timely category reviews, new items, category expansions, shared services, and just running great stores -- full, fun, exciting stores.

Dollar Tree Canada continues to be a key brand in our portfolio, and an important component of our growth strategy. I'm extremely proud and pleased with the progress made by our merchant and store teams in Canada. Their continued efforts to serve the Canadian customer are delivering higher store productivity each year.

Comp sales momentum continued in the fourth quarter, driven by increases in both average ticket and customer count. Leveraging the buying power of Dollar Tree our merchants continue to source higher-value product, and our customers are finding broader, more exciting assortments, and better values in Dollar Tree Canada stores. Our goal is to be recognized by customers as the leading retailer in Canada at the single price point of CAD1.25, just as we are in the US at the $1 price point. We now operate 226 stores in Canada, and believe we have an opportunity for 1,000 stores over time.

In addition to Dollar Tree, Family Dollar, and Dollar Tree Canada, our online business at Dollar Tree Direct is growing in size, performance, and importance. Dollar Tree Direct provides an opportunity to broaden our customer base, drive incremental sales, expand brand awareness, and attract more customers into our stores. While Dollar Tree Direct is a relatively small component when compared to our overall business, I continue to be very pleased with its year-over-year growth.

As retailers in the digital age, we plan to engage with our customers wherever and however they prefer. We strive to run world-class stores, deploy world-class digital mediums, and engage with our customers via conventional and digital marketing channels such as e-mail, Facebook, Pinterest, how-to-craft videos, Twitter, and much more.

Whether customers prefer to contact Dollar Tree direct via their phones, their pads, their laptops, or their desktops, we're ready and able to connect with them. We continue to be very pleased with the growth of both sales and visitors to our Dollar Tree Direct business. Please check us out at DollarTree.com. Now I will turn the call over to Gary to provide more detail on our performance and our priorities.

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Gary Philbin, Dollar Tree, Inc. - Enterprise President [4]

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Thank you, Bob, and good morning, everyone. As Bob commented, we are pleased with our performance in the fourth quarter, but we know we're still capable of doing better. We operate in an environment of continuous improvement, and drive the key business initiatives that focus on delivering better in-store shopping experience, top-line sales growth, margin enhancement, and cost reduction.

For the quarter, our enterprise same-store sales increased by 1.2%. Highlights for the Dollar Tree banner include total sales in Q4 increased 7.9% to $2.9 billion, same-store sales on a constant-currency basis increased 2.3%. This was achieved through increases in both traffic and average ticket.

Gross profit margin improved 110 basis points over Q4 last year, and fourth-quarter operating margin was 16.4%, an improvement of 140 basis points over last year's 15%. And, Dollar Tree's operating margin for the full year in 2016 grew 130 basis points to 12.9%, a new record for Dollar Tree.

To share some of the highlights on the quarter, our top-performing categories for the Dollar Tree banner include candy, seasonal, party supplies, snacks and beverages, toys, and household products. Sales performance was balanced between both our discretionary and consumables. We delivered positive same-store sales each month throughout the quarter.

November, which benefited from the Halloween shift, was our strongest comp month. Geographically, Dollar Tree same-store sales growth for the quarter was very balanced, as each of our operating zones delivered positive comps that exceeded 1%.

The Dollar Tree business continues to be strong, consistent, and growing. This represented our 36th consecutive quarter of positive same-store sales, and a full-year operating margin that is historically one of our highest. Our fourth-quarter results validate the relevance of the Dollar Tree brand. Customers continue to shop for value and convenience.

Highlights for the Family Dollar banner in the fourth quarter included a total sales increase of 2.2%, a same-store sales increase of 20 bps. Average ticket was up 30 bps, and traffic was down slightly. Gross profit margin improved 110 basis points over last year, and operating margin was 4%, an improvement of 160 basis points over the prior-year quarter.

Our Family Dollar highlights for the quarter -- our top-performing categories for Family Dollar included electronics, snacks and beverage, candy, men's apparel, and cough and cold supplies. Our comp performance was driven by consumables. We delivered positive same-store sales in both November and January. November, of course which benefited from the Halloween shift, was our strongest comp month. Geographically, Family Dollar same-store sales growth for the quarter was relatively balanced, with our west and northeast operating zones being the strongest.

We are now 18 months into our integration, and we continue to make progress at Family Dollar around the key foundational elements that will drive our performance -- store table stakes, focus on merchandising value, and consolidation of shared services.

Our efforts continue to be around customer-facing initiatives that our shoppers continue to give us credit for, as we work to improve these across our base of 8,000 stores. Our customers are seeing cleaner, better-merchandised stores that have more compelling end-caps, with products they need for everyday basics and holiday wants. While we have more to do here, we are on the right track with our continued investment in the basics of our Family Dollar banner.

These customer-facing programs to drive and show value throughout the store continue to build momentum across our Smart Ways to Save marketing program. Our customers continue to respond to the value and savings across all of our foundations on delivering value for our Family Dollar customer.

The Smart Ways to Save strategy connects the values in our ad to the merchandising in our stores; EDLP pricing on our everyday value; sale items that reflect the most meaningful values on key items; our Dollar Wow items that drives the surprise in opening price point throughout our stores; Compare and Save to shout out our excellent value of our private brands; Price Drop, great value on the items our customers buy most often; and most recently, Smart Coupons, the easy way to find additional savings.

Our customers are continuing to respond and embrace our Smart Coupons, with sign-ups exceeding our projections since our Labor Day kickoff. For our regular shoppers, this program provides a no-hassle shopping experience to find national and Family Dollar exclusive offers. For Family Dollar, it's a great way for us and our vendor partners to reach a demographic that is uniquely served by Family Dollar. It enhances the delivery of our Smart Ways to Save messaging.

Another one of our foundational parts of our strategy for success is our focus on table stakes. At a high level, this includes our improved store standards and conditions -- neat, clean, full, and recovered; merchandising relevance and energy; finding what I need at Family Dollar at a value I recognize; and customer engagement. It's our energy around Family Dollar friendly.

Our customers count on us all month long, but the first 10 days of the month are critical in our efforts to have our in-stocks on shelf recovered, and end-caps with compelling offers. Our focus here revolves around our efforts to have improved on-shelf in-stocks, along with our operational teams improving our truck-to-shelf process -- back to the basics.

The convenience of our stores, combined with our focus on improvements across the customer-facing initiatives is foundational for an improved customer experience at Family Dollar. While we have more to do, our team at Family Dollar is motivated and energized to do their best at delivering value to our customers. They are unique in many ways, and often under-served. Our stores serve a customer that counts on us, and responds when we deliver value, customer service, and a Family Dollar shopping experience that we are all proud of in the neighborhoods we serve.

Now looking at real estate in the fourth quarter, we opened a total of 104 new stores, 47 Dollar Trees, and 57 Family Dollars. We relocated or expanded 27 stores, 6 being Dollar Trees, 21 Family Dollars; and we re-bannered 8 additional Family Dollars to Dollar Tree, for a total of 139 projects during the quarter. We also added freezers and coolers into 86 Dollar Tree stores during the fourth quarter, bringing our total of Dollar Tree stores with freezers and coolers to 4,788 stores.

During the quarter we closed 55 stores, 15 Dollar Trees and 40 Family Dollars. We ended the fiscal year with over 14,000 stores, 14,334 -- 6,360 Dollar Trees and 7,974 Family Dollar stores. For FY16, we opened 359 new Dollar Tree stores, 225 Family Dollar stores, for a total of 584, which exceeded our target of 550 new stores during the year.

For 2017, our real estate plans include 650 new stores, 350 Dollar Tree and 300 Family Dollar stores; renovations at 250 Family Dollar stores; cooler and freezer expansions in 300 Family Dollar stores; and adding freezers and coolers to 400 new and existing Dollar Tree stores.

As I mentioned, we are pleased with our progress, but there is much work and opportunity that lies ahead of us. I will now turn the call over to Kevin to provide more detail on Q4 performance, and our initial outlook on Q1 and FY17. Kevin?

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Kevin Wampler, Dollar Tree, Inc. - CFO [5]

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Thank you, Gary, and good morning. Total sales for the fourth quarter grew 5% to $5.64 billion. This was at the mid-point of the guidance range of $5.59 billion to $5.69 billion. Dollar Tree segment total sales increased 7.9% to $2.9 billion. Family Dollar segment total sales increased 2.2% to $2.74 billion.

Beginning in our fourth quarter, the acquired Family Dollar stores are now included in our overall same-store sales. Enterprise same-store sales on a constant-currency basis increased 1.2%. Adjusted for the impact of the Canadian currency fluctuations, same-store sales grew 1.3%.

On a segment basis, same-store sales increases were 2.3% for the Dollar Tree banner, and 0.2% for the Family Dollar banner. As expected, we experienced incremental cannibalization from Family Dollar and Deals stores that have been converted to Dollar Tree stores. We estimate the incremental cannibalization impact of the Dollar Tree banner comp to be approximately 50 basis points for the quarter.

Gross profit for the combined organization increased 9.3% to $1.81 billion for the fourth quarter of 2016 compared to the prior-year's quarter. As a percent of sales, gross profit margin improved 130 basis points to 32.1%, versus 30.8% in the prior-year's quarter. Gross profit margin for the Dollar Tree segment was 37.5% during the fourth quarter, a 110-basis-point improvement compared with the prior-year's fourth quarter.

Factors impacting the segment gross-margin performance during the quarter included lower merchandise cost due to higher initial mark-on and favorable freight costs; and lower mark-downs due to the Deals conversions in the prior year. These were partially offset by higher distribution and occupancy costs as a percent of net sales.

Gross profit for the Family Dollar segment increased 6.6% to $718.5 million. Gross profit margin for the segment was 26.3% during the fourth quarter, compared with 25.2% in the comparable prior-year period. Excluding the inventory step-up amortization of $15.9 million in the prior year's quarter, gross profit margin was 25.8% for Q4 of 2015. The improvement was due to lower merchandise, freight, and shrink costs, partially offset by higher mark-down expense and increased distribution and occupancy costs.

Consolidated selling, general, and administrative expenses in the quarter improved to 21.7%, from 22% in the same quarter last year as a percent of net sales. Q4 SG&A expense for the Dollar Tree segment as a percent sales improved 30 basis points to 21.1%, from 21.4% in the prior year's quarter. Decreases in payroll costs, legal fees, depreciation, and advertising, were partially offset by increases in store wages and retirement plan contributions.

SG&A expense for the Family Dollar segment was $608.1 million, and as a percent of sales was 22.2%, compared to 22.7% year in the prior year's quarter. The improvement was driven primarily by lower payroll costs, including incentive comp, stock comp expense, workers' comp insurance, and health insurance costs, as well as lower legal and depreciation expense. These decreases were partially offset by higher store hourly payroll, advertising, and repair and maintenance costs.

Operating income for the enterprise increased to $586.5 million, compared with $469.7 million in the same period last year. Operating margin increased to 10.4% for the quarter, from 8.8% in last year's fourth quarter. Operating income margin for the Dollar Tree segment improved 140 basis points to 16.4% when compared to the prior year. The operating income for Family Dollar segment increased $45.1 million to $110.4 million, a 160-basis-point improvement as a percent of sales when compared to the prior-year's quarter.

Non-operating expenses for the quarter totaled $88.8 million, which was comprised primarily of net interest expense, and $11.7 million of acceleration of amortizable non-cash deferred financing costs related to our debt pre-payment made in January. Our effective tax rate for the fourth quarter was 35.3%, compared to 35% in the prior year's quarter.

For the fourth quarter, the Company had net income of $321.8 million, or $1.36 per diluted share, compared to reported net income of $229 million, or $0.97 per diluted share in the prior-year's quarter. The current year includes $0.03 of expense for the write-off of amortizable non-cash deferred financing costs incurred during the quarter, as previously noted.

Looking at the balance sheet and statement of cash flow, our combined cash and cash equivalents at year end totaled $866.4 million, compared to $736.1 million at the end of 2015. Our outstanding debt is approximately $6.3 billion, a decrease of $1 billion from the prior-year end.

Inventory for the Dollar Tree segment at quarter end was 4.6% greater than at the same time last year, while selling square footage increased 6.6%. Inventory per selling square foot decreased 2%. We believe that current inventory levels are appropriate to support scheduled new store openings and our sales initiatives for the first quarter.

Inventory for the Family Dollar segment at quarter end decreased 4.6% from the same period last year, and decreased 6% on a selling-square-foot basis. We are 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 first quarter.

Capital expenditures were $113.2 million in the fourth quarter of 2016, versus $144 million in the fourth quarter of last year. For FY17, we're planning for consolidated capital expenditures to range from $760 million to $780 million. Capital expenditures will be focused on new stores and remodels, including fee development stores.

Our plans include renovating 250 Family Dollar stores in 2017; the addition of frozen and refrigerated capability to a total of 400 new and existing Dollar Tree stores; the expansion of frozen and refrigerated for 300 Family Dollar stores; IT system and enhancements and integration projects; the start of construction of a new Dollar Tree banner distribution center; and the continued build-out of a new office building for the store support center in Chesapeake.

Depreciation and amortization totaled $155.5 million for the fourth quarter. This includes purchase-accounting-related costs of $17.9 million for favorable lease rights amortization. Depreciation and amortization expense was $174.9 million in the fourth quarter of last year.

For FY17, we expect consolidated depreciation and amortization to range from $610 million to $630 million. This includes $66 million for FY17 for the amortization of favorable lease rights for the purchase accounting valuation of Family Dollar leases.

Before I speak to our assumptions included in our 2017 guidance, I want to outline the one-time or unique items that impacted our 2016 earnings by quarter. In Q1 2016, we had a one-time $0.09 per share benefit in our tax rate, related to state tax planning. In Q3 2016, we had a one-time $0.09 per share benefit in our tax rate related to a reduction in state tax rate, which decreased the deferred tax liability related to our trade name and tangible asset. Also in Q3 2016, we incurred $0.09 per share in expenses related to our debt refinancing. Lastly, in Q4 of 2016 we incurred $0.03 per share in expenses related to our debt pre-payments.

Our initial outlook for FY17 includes the following assumptions. FY17 includes a 53rd week. The extra week in the fourth quarter is expected to add $400 million to $430 million to sales, and $0.19 to $0.22 to earnings per diluted share, both of which are included in our guidance.

For the next two quarters, we will continue to experience a higher-than-normal degree of cannibalization to Dollar Tree comps from our re-banner efforts. We expect continued pressure on store payroll based on states increasing minimum wages, and general average hourly rate increases. We have budgeted higher import freight costs than a year ago starting in Q2, and higher diesel costs for the year.

Net interest expense will be approximately $75 million per quarter in Qs one through three, and approximately $81 million in Q4 due to the extra week. Our guidance does not include any impact related to FLSA overtime regulation changes, which were postponed last November.

Our guidance does not include any share repurchases for 2017. We cannot predict future currency fluctuations; we have not adjusted our guidance for changes in currency rates. Our guidance assumes a tax rate of 37.2% for the first quarter, and 37% for FY17. Weighted average diluted share counts are assumed to be 237.5 million shares for Q1 and 237.7 million for the full year.

For the first quarter, we are forecasting total sales to range from $5.26 billion to $5.35 billion, and diluted earnings per share in the range of $0.91 to $0.98. This compares to a reported $0.98 per diluted share from the prior year's first quarter, or $0.89 per diluted share when adjusted for the one-time tax rate benefit of $0.09 per share related to state tax planning. These estimates are based on a flat to low-single-digit same-store sales increase, and year-over-year square footage growth of 3.9%.

For FY17, we are forecasting total sales to range between $21.94 billion and $22.33 billion, and diluted earnings per share in the range of $4.20 to $4.56. These estimates are based on a flat to low-single-digit same-store sales increase, and 3.9% square footage growth, and include the benefit of the 53rd week occurring in Q4 FY17, as previously noted. I will now turn the call back over to Bob.

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Bob Sasser, Dollar Tree, Inc. - CEO [6]

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Thank you, Kevin. Again, I am extremely pleased with our solid performance for the fourth quarter, and I'm proud of our combined Family Dollar and Dollar Tree teams. We continue to make meaningful progress with our integration plans. We believe that we are well positioned in the most attractive sector of retail to deliver continued growth and increased value for our long-term shareholders.

Dollar Tree is now a diversified combination of a 6,000 store chain and an 8,000 store chain, each with its unique ability to effectively serve more customers through all types of markets. With the combination of these two great brands, we have great flexibility in how we choose to grow, while expanding our opportunity to grow. We will continue to focus on providing greater values to our customers while delivering superior returns to our long-term shareholders.

Recently I joined our combined merchandise teams on their post-holiday overseas buying trip. I was very pleased and encouraged by the results from this trip, as we continue to develop business relationships, identify and secure tremendous values, improve our supply chain and quality control, while meeting our targeted margin thresholds. We have developed valuable experience and expertise over the years, and we are leveraging this for the benefit of our customers across all banners.

In recent months, there's been an inordinate focus on the proposed border adjustment tax. We, like most other retailers, feel that the border tax would result in a significant burden to the consumer, both through reduced choices and higher prices. We are working with the National Retail Federation, Retail Industry Leaders Association, and the Americans for Affordable Products group to express our concerns.

At this early stage, we cannot answer questions regarding potential impacts until we know what, if anything, is passed. But I do know this, for 30 years Dollar Tree has demonstrated its ability to adapt and react in managing our business effectively. Over the past 30 years, we have seen inflation in all costs, including product, labor, transportation, and real estate, and we've been able to successfully maintain our $1 price point, deliver relatively consistent gross margins, and still provide tremendous values to our shoppers.

As always, we will continue to employ a disciplined approach to driving key strategic initiatives to the combined enterprise, through improved communication, analysis, collaboration, and incentives. We are confident that continuing to place our 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's powerful, flexible, and more relevant than ever, providing extreme value to customers while recording record levels of sales and earnings. While after 30 years, our price point at Dollar Tree stores remains at $1, our operating margin continues to grow, and leads the discount sector.

For the full year 2016, our Dollar Tree operating margin improved 130 basis points to 12.9%. Our model has been tested by time and validated by history.

For 36 consecutive quarters, we have 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. In the fourth quarter, total sales increased 5%, enterprise-wide same-store sales increased 1.2%, and operating margin improved from 8.8% a year ago to 10.4%.

It all starts with our associates. Our merchandise teams and 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Matthew Boss, JPMorgan.

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Matthew Boss, JPMorgan - Analyst [2]

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Thanks. Bob, on same-store sales, what's the mindset around including flat at the low end of the flat-to-low-single-digit guide for this year? Any change in the competitive landscape, or any change in the way that you view the Family Dollar productivity opportunity?

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Bob Sasser, Dollar Tree, Inc. - CEO [3]

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Yes, Matt, we are extremely excited about the opportunity for productivity increases in Family Dollar and in Dollar Tree. As we sit here first quarter looking out across a whole year, we have great confidence in our ability to implement and to execute our initiatives. We have great confidence in our models and our initiatives. Our value retail model is as good as there can be. I believe we're positioned exactly where we need to be as we go into 2017.

It's not a lack of confidence. It's more just it's first quarter, and we're looking out across the year. We're looking at our business. We're looking at some uncertainty out in the economic environment, and some fits and starts. As a result, we put all that together, we put what we know on the page, and then we put the uncertainty, and that's how we come up with our guidance. We want to always be fair and measured, and make sure that we give you the best information that we can possibly give you. As always, we intend to continue to improve and exceed expectations wherever possible.

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Matthew Boss, JPMorgan - Analyst [4]

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That's great. Then just to follow up, at the core Dollar Tree, so roughly 90 basis points of operating margin expansion this year, almost 13% today, how would you rank the margin opportunity from here at the core Dollar Tree banner?

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Bob Sasser, Dollar Tree, Inc. - CEO [5]

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Well, there's still plenty of opportunity. There are some head winds that we have in our ocean freight and some of the things that Kevin called out with diesel fuel a little higher now; but we've always been able to -- as long as we can see it coming, we've always been able to manage around that, and always drive our operating margin.

As you know, I've always said we are in charge of our gross margin. At Dollar Tree, we go to market with two things in mind. Our buyers are looking for the best value for the dollar for the customers at a margin we are willing to accept. We decide. Sometimes we take opportunities that we find in the market and we use those to drive sales. Sometimes we take it into our margin, but we're always in control of what we're doing.

We feel really good about our Dollar Tree margin. Again, this is our 30th anniversary. It's 30 years, everything's a dollar, every increasing improvements in the business, still hitting some high-water marks at 12.9% operating margin, and I think we can continue that.

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Matthew Boss, JPMorgan - Analyst [6]

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That's great. Best of luck, guys.

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Operator [7]

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Karen Short, Barclays Capital.

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Karen Short, Barclays Capital - Analyst [8]

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Hi, thanks for taking my question. Wondering if you could give an update on where you are on synergies to date, and costs incurred to achieve the synergies. Then just an update on whether $150 million is still the right run rate to think about for 2017?

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Bob Sasser, Dollar Tree, Inc. - CEO [9]

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Yes, Karen. I think as we've said from day one, our expectation is to be able to achieve $300 million, and hopefully exceed that at the end of the day. As we broke that out, we broke it out as $75 million the first year, $225 million by the end of the second year, and $330 million by the end of the third year. We think we're right where we need to be, on track, maybe just a little bit ahead, so I think that feels pretty good.

The one-time cost to achieve, again, we spoke a little bit to that last quarter. Again, when we originally talked to that, we talked about it being about half of that being operational expenses and half of it being capital expenses. I think to this point, it's probably been a little bit more on the CapEx side, again, because of the re-banners we've done -- the 300 re-banners, as well as the 200 Deals re-banners, the system integration that's gone on, the work around co-bannering the Utah distribution center.

On the OpEx side, it's been a little less, but there has been some consulting, professional fees, and some various other costs there. All in all, I think we feel like we're well on target, and going to be able to hit and work very hard to exceed that $300 million.

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Karen Short, Barclays Capital - Analyst [10]

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Great, thanks, and a follow-up on the first-quarter guidance. The earnings guidance was a little lighter than consensus. Is there anything to point to there?

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Kevin Wampler, Dollar Tree, Inc. - CFO [11]

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I don't know if there's anything specifically to point to. I think as we look at it, a couple things. One, Q1 from the diesel cost perspective, it is the biggest change quarter to quarter. The diesel cost was about $0.02 of head wind in basically Q1. That's bigger than it is in any other one. Again, you want to make sure that people are comparing it to the adjusted number of last year of $0.89, as opposed to what was reported, because of the tax benefit of a year ago. That's probably the biggest thing I would point out is diesel costs. Otherwise, I think we feel pretty good about the number we've been able to put out there.

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Karen Short, Barclays Capital - Analyst [12]

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Great, thanks.

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Operator [13]

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Scot Ciccarelli, RBC Capital Markets.

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Scot Ciccarelli, RBC Capital Markets - Analyst [14]

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Good morning, guys. You broke into positive comp territory for Family Dollar this quarter. As you continue to work on improving the store format, updating the merchandise, et cetera, is there anything we should keep in mind as to why that banner may comp negative at some point during the course of the year, or do you expect it to be stable going forward?

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Gary Philbin, Dollar Tree, Inc. - Enterprise President [15]

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Scott, this is Gary, good morning. The way I think about the business is we got to a slight positive comp in Q4, and that was a quarter that was positive both in November and January. As we've made our plans for the year, the foundational things that we're putting in place -- running better stores, and that revolves around just having our products in stock, cleaner, fuller, the retail basics that we've been talking about -- those are the things that I think start to deliver year-over-year better comps for us.

Some of the strategic things that we mentioned in the call, core expansion. We will be starting a renovation program. Those are things that will over time shift our fleet of stores from how they operate today to something different in the future. Then maybe the third piece is really around the merchandising and the assortment. As we think about what a Family Dollar customer needs and wants, those are the longer-term enhancements we will see as we go through buying cycles, both on imports and our domestic products.

When I take a look at the year, we're a retailer. We're always bullish that we're doing the foundational things that help us stay more consistent with our progress on top-line sales, and then continue to work very hard on the things that are going to drive margin and cost down to the business to get to a consistent growth trajectory on operating margin.

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Scot Ciccarelli, RBC Capital Markets - Analyst [16]

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Gary, given some of the competitive commentary, whether it's Wal-Mart, Target, Dollar General, et cetera, do you think there's going to have to be any kind of price adjustments at Family Dollar during the course of the year, or is that already contemplated in your expectations?

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Gary Philbin, Dollar Tree, Inc. - Enterprise President [17]

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Well, everything we know is in our guidance. I think the current news that everyone's reacting to, clearly it's in the grocery sector. Doesn't mean that we're not on the fringe of that, but a Family Dollar business is driven more by our convenience and controlling our own four walls. Those are the things that we're focused on to stay in front of for 2017.

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Scot Ciccarelli, RBC Capital Markets - Analyst [18]

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Got you. Thanks a lot, guys.

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Operator [19]

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Brad Thomas, KeyBanc Capital Markets.

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Brad Thomas, KeyBanc Capital Markets - Analyst [20]

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Yes, good morning. Thanks for taking the question. I wanted to follow up on some of the Family Dollar questions, and hoping you could highlight a bit more where you think you've made the most progress from a daily execution, blocking and tackling standpoint, and where you really want to focus the most in 2017? Thank you.

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Bob Sasser, Dollar Tree, Inc. - CEO [21]

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All right, thank you. I would thank you for the question, because it gives me a chance to brag a little bit on our folks who have worked very hard on really just the basics, but the hard work that goes into running our stores. Where are we? While we know we're not to the finish line, but I would color it this way. Our in-stocks, what our customer sees on the shelf, is certainly better than where we started 18 months ago. In our efforts to catch up on some of the deferred maintenance and cleaning, and the basics that we need to run a full, clean, recovered store are in place. Our operational teams are heavily focused on our consistency of providing that day in and day out.

I commented on it, but for our customers, it really revolves around, are we first-of-the-month ready at Family Dollar? That's a very important focus for us to gain consistency with our customer. It tends to show up with our first-of-the-month business and our share of SNAP that we take. Those are the things that I would say we've improved on. We have more work to do across all of those.

I am pleased with the efforts our folks are putting towards it. It's going to be one of just the basic table stake foundational initiatives that we stay with for several years, because we will always be able to find a way to improve. As we start to be able to renovate some of our older stores, our customers store by store will see something that's different. That's just as important when we're talking about the stores that serve their neighborhood. I'm encouraged with where we are at. More to be done, but it's a consistent message and focus around the organization right now.

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Brad Thomas, KeyBanc Capital Markets - Analyst [22]

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Great, thank you very much.

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Operator [23]

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Paul Trussell, Deutsche Bank.

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Paul Trussell, Deutsche Bank - Analyst [24]

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Hi, good morning. I just wanted to inquire about Duncan's hiring, if you can touch on that. Then also, if possible, could you describe in a little bit more detail maybe the expectations on both comps and margins per banner? To the extent that -- how should we be thinking about comps for FDO versus Dollar Tree. Is the 200-basis-point spread between the two banners as we saw in the fourth quarter perhaps the thought process over the rest of the year, or could that spread narrow or widen? Similarly on margins, is there more opportunity or more pressure at the tree segment versus FDO? Thanks.

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Bob Sasser, Dollar Tree, Inc. - CEO [25]

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Hi, Paul, this is Bob. I will take the first part. In order to answer your question about Duncan, let me take you back to about 18 months ago when we made the acquisition of Family Dollar. At that time, if you remember there was no President at Family Dollar. The President had already left. I thought that when we made the acquisition that it was extremely important first day to have a President in place.

Gary Philbin, who had been President at Family Dollar, my partner here for a long time, stepped up and went down, moved down to Matthews, and on day one we had a president of Family Dollar in place to lead the team. He's done a terrific job energizing the team, communicating, building the initiatives, getting some traction on the business, cleaning up old inventory, doing all the things to revitalize the marketing campaign and the customer communication. I couldn't be more proud of what Gary has done.

But I was still one President short with that combination. As Gary went down to Matthews, we launched into a national search with a national search Company, looking for a President, a future President of Family Dollar, and we found Duncan. I will tell you that Duncan, when we met, I knew that he was exactly the right person for this job. His background, he had consumer products background, he had supermarket background, he had big-time discount store background, and he had demonstrated throughout his career a real ability to build store teams, to build merchant teams, to build an organization, and to drive success. I was real pleased to bring Duncan on board.

Duncan has been down there just a short period of time, but I will tell you he is stepping in, and he's started running. If you talk to the folks down at Family Dollar, I think you would hear from them that they really have engaged with Duncan and he has engaged with them in a positive way. We're very excited about adding Duncan to the Management team.

In addition at this point in time, we brought Gary -- we elevated Gary to Enterprise President. As Enterprise President, Gary now has responsibilities for all the customer-facing initiatives, all of merchandising, all the store operations, and real estate across both banners. Gary reports to me, as does the shared services organizations report to me. That was the trail of how all this began, and we're really pleased to have Duncan on board. We're also pleased to have Gary in a new role. I'll let Kevin speak to the second part of the question.

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Kevin Wampler, Dollar Tree, Inc. - CFO [26]

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Good morning, Paul. From a big-picture perspective, in regards to comps, obviously from a Dollar Tree side of the equation we expect the cannibalization we've seen from the re-banner process to dissipate as we go through Q1 and Q2, and really be pretty much done by the end of Q2. The back half really shouldn't have any head winds, per se, from the re-banners for the most part, so that's a positive on that perspective.

I think on the Family Dollar side, we think it's been a little harder for us to forecast, just in general I would say, just from a rhythm standpoint at this point in time, so we take that into consideration. There's been a little bit more variability to the business. It doesn't mean we believe they're not going to comp positive and be able to be a meaningful contributor at the end of the day. I think the way we're going to look at it as we go forward is we're going to give you enterprise guidance, and then when we report the quarter we will break it out and give you the two segments, as well. That's how we're thinking about it going forward.

From maybe a little bit bigger picture for the year, from a -- speaking to the moving pieces within our P&L, so to speak, on a consolidated basis, we do expect to see improvement in our gross profit this next year -- for this year we just started, I should say. Really, expect mark-on to continue to improve in both banners. We're going to work to lower our mark-downs as a percent of sales in our Family Dollar banner.

We're going to continuing to see a little bit of geography change from the standpoint on the Family Dollar banner. We talked about this last quarter in the sense of our process where we're getting our co-op dollars net in our first costs, as opposed to offsetting advertising. You have the benefit in gross profit; you actually see advertising expense in SG&A go up, but that's a geography difference. We know some of those improvements are going to be somewhat offset by the higher freight costs that we've already talked about, but in general we're expecting gross profits to improve.

On the SG&A side, I think there's expecting flattish to maybe a slight improvement. I think the head winds are, in SG&A, are going to be the pressure on store wages in both banners. Again, we've got minimum wage increases and just general average hourly rates that are increasing more than what we've seen over the last probably four or five years, realistically.

As well in SG&A, we do have the advertising that I spoke to that will be an increase year over year. Somewhat offsetting that then is we will expect lower depreciation, based upon the range I gave this year. The mid-point of that range would be $620 million, which compares to last year's actual of $637 million, so depreciation is actually going lower.

Those things, as we look at that then, if you look at our operating income, at that mid-point of our guidance you would be looking at operating income of approximately 8.8% to 8.9%, which is a compared to the 8.23% that we reported on the press release today. At the mid-point, still a nice increase in the overall operating income as we go forward. Those are some of the moving pieces, big picture, as we move into 2017.

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Paul Trussell, Deutsche Bank - Analyst [27]

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Thanks for the color.

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Operator [28]

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Dan Binder, Jefferies LLC.

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Dan Binder, Jefferies LLC - Analyst [29]

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Thanks for taking my question. I just had to follow up on some of the pricing investment that was asked about earlier. If we look at your Family Dollar results, you've allowed gross margin to grow up a decent amount over the last several quarters. The comps have been slightly negative to slightly positive more recently. I'm just wondering philosophically, do you think if you were to take some of that gross margin and reinvest it in price, particularly against the backdrop where many of your competitors are, that you might see better comp results, and then benefit from the flow-through on that?

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Gary Philbin, Dollar Tree, Inc. - Enterprise President [30]

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Hi Dan, Gary. I think one of the things that you point out with the question is the synergy does give us some flexibility in our sector. We certainly monitor all of the price checks, like everyone else, and what's happening across not just our sector but also the other channels as well. Over the last 18 months, we have had a very mindful eye exactly where we are compared to each of the targets we have by market.

Our answer to that has been Smart Ways to Save, which gives us flexibility, and maybe even more than that, points to the way we show our offers to a Family Dollar customer. We do see a customer that shops differently -- I mentioned first of the month before. Clearly that's a big driver for us. What's on shelf and end caps and either it's on sale or a priced drop is how we're approaching it.

Looking forward, we are going to watch everyone this year, as we go into price checks and see what they're doing across the shelves, and we'll react accordingly. But to some degree, you know it's not new news. Everyone has been waving their flag on saying they're going to bring value. We're in a sector that delivers that with a convenience factor attached to it for our customers. That's how we're thinking about it starting off the year.

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Dan Binder, Jefferies LLC - Analyst [31]

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Then just a follow-up, a different topic, but again a philosophical question. I know you can't say a whole lot about the impact on border-adjusted taxes, but if one were to go through, are you strongly opposed to breaking the buck, or do you think it would be smarter to just keep that level, and engineer the product packaging and counts, so forth, to keep it at that level?

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Bob Sasser, Dollar Tree, Inc. - CEO [32]

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Dan, again as I said in my prepared remarks, it hasn't been passed yet. If it is passed, we really need to see what it covers and how it's done and what the rules are and all that. I'm sure we'll be able to respond accordingly to that.

We have a lot of levers across both banners that we can do. I believe that the pressure on the consumer is going to be potentially if passed the way everybody is contemplating could be a real issue for the consumer, but as far as retailer -- we're a retailer just like everyone else, we will respond accordingly.

I will tell you this. At Dollar Tree, we are -- for 30 years we've been $1. You talk about the price point. I've been asked that question for a long time on other issues as cost changes, as expenses changed, as the markets changed, as inflation, deflation, and the like. We are able to manage that, because we are able to manage our assortment at Dollar Tree. As long as a dollar is a unit of currency I believe, and we can offer the best value, then we've got a business.

Let's wait until we get there. Let's let us see if it's passed, and if passed, then what the rules are, and they we'll respond accordingly. But I believe we have as much a right as anyone to respond and run a great business going forward. It will be different, but let's see what the rules are first.

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Dan Binder, Jefferies LLC - Analyst [33]

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Great, thank you.

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Operator [34]

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Dan Wewer, Raymond James.

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Dan Wewer, Raymond James & Associates, Inc. - Analyst [35]

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Hi, good morning, Bob.

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Bob Sasser, Dollar Tree, Inc. - CEO [36]

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Good morning.

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Dan Wewer, Raymond James & Associates, Inc. - Analyst [37]

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Can you talk about the 300 new Family Dollar stores you are opening in FY17, and what will be different about these stores compared to the Family Dollar stores you inherited, perhaps any commentary about real versus suburban versus urban locations, things you're doing different, anything different with the store layout, number of coolers? Give us some insight as to how you see the long-term vision for this concept changing?

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Gary Philbin, Dollar Tree, Inc. - Enterprise President [38]

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Hi Dan, this is Gary. Let me take a swing at it first. We're excited to have 300 stores and the renovations. What you're going to see -- listen, the headline is, how do we drive a more productive store for our customers at Family Dollar that really enhances the shopping environment? You're going to see some things that both drive traffic and enhance the customer's shopping experience, especially on the discretionary side as well.

I am not going to give the blueprint of everything that you'll see out there, but the model will be small box, still. We certainly know how to run our box, both in urban and rural. What we're going to drive is really the categories and adjacencies that make sense in a Family Dollar world. I think our opportunity is to find the categories that consistently drive in traffic week in and week out, which has not always been the case as the box has been developed over time. We certainly have the pieces to make that a better shopping environment for our customer.

Some of that can be our consumables and the frozen food and on the margins pieces, so the elements we do on seasonal. We aren't the same party department that Dollar Tree is by a long shot, but certainly our customers still have birthdays and celebrate seasons, and those are things that we can enhance and shine up in a Family Dollar world.

The difference that we really have is we still have apparel. Apparel is a category that for us we can win in. It's always been a matter of space, and the dedication that you give it within the store. Those are some of the items that when you combine with the basic elements, are smart ways to save that will come to life in these stores in a way that show our customer categories adjacencies and the items they need and want, we think, in an exciting shopping environment, is what these will look like.

You'll see a split with both urban and rural locations. We know we can be successful in both, and you will see that split -- maybe not evenly between the two locations, but it will be fairly close on both.

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Dan Wewer, Raymond James & Associates, Inc. - Analyst [39]

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Okay. Then as a second question, most of the Family Dollar stores that we have visited -- not all, but most, the in-store standards continue to look a lot better than they did a year ago. Again, I'm sure that the same-store sales growth you were hoping would be a bit better. There's been some discussions about pricing this morning. Our pricing surveys show that your identical pricing is about 10% above Wal-Mart on consumable items -- the gap widening because of what Wal-Mart is doing. With the addition of Duncan and his background at Wal-Mart that believed in using pricing to drive share, do you think that could be the catalyst that could -- his addition could be the catalyst that leads to Family getting more competitive in pricing on branded items?

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Gary Philbin, Dollar Tree, Inc. - Enterprise President [40]

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Well, I'm counting on it. Listen, I'm thrilled to have Duncan as a partner, number one. Duncan is going to help us tremendously. I would tell you that. I would echo what Bob said, his experience doesn't need me to polish it up.

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Dan Wewer, Raymond James & Associates, Inc. - Analyst [41]

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I was thinking in terms of pricing, with his background at Wal-Mart using pricing promotional strategy to drive share. Do you think that he'll have a stronger voice for Family Dollar making that change?

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Gary Philbin, Dollar Tree, Inc. - Enterprise President [42]

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He's going to be President of Family Dollar. He's going have as strong a voice as anyone at the table. Here's what I'd like to think about. Listen, the price checks -- I get more than everybody out in the field, I am sure. The way I take a look at the price checks, and whether it's 10% -- and I don't know where you're checking, but we react accordingly.

It comes across both on-shelf everyday pricing. We're rooted on EDLP. We need to show a weekly promotion when we put our ad out there. We want to show our customers savings on Price Drop, which are some of the things they buy most often. It's a combination of all those things that we go to market with that react to a Family Dollar customer. We're going to be mindful where Wal-Mart is, and certainly anybody in our sector. But we have more than one tool to go to show our customer value in our store. That's how we think about it.

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Dan Wewer, Raymond James & Associates, Inc. - Analyst [43]

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Okay, great, thank you.

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Operator [44]

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Laura Champine, Roe Equity Research.

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Laura Champine, Roe Equity Research - Analyst [45]

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Thanks for taking my question, and I'm sorry if I missed this, but when you look at 2017, do you think that the mix shifts more into discretionary, or do you expect consumables to stay just as strong as they have been?

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Bob Sasser, Dollar Tree, Inc. - CEO [46]

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Well, I would say, Laura, that as strong as they have been, in my opinion, the mix at Dollar Tree -- we have two different banners here. We're a lot more discretionary in the Dollar Tree banner than in the Family Dollar banner. My expectation is that we'll continue to grow both discretionary and consumable, but mix is going to be pretty much I think the same.

At Family Dollar, I think there's an opportunity to sell a little more discretionary. We're going to still go after the consumable business. We want to be the place where our customers shop for the things they need every day. We want to be convenient. We want to have great values for our customers and all the things that they need. We're not backing down on the consumable business.

At the same time, we want to offer them more of the things that are discretionary at great values. Gary mentioned some of the things. Everybody has birthdays, our apparel business, our home business. We have, I believe, terrific opportunities at Family Dollar in driving more discretionary business in our home departments, for example.

It's a big question. It's a good question, but at a high level, that would be my answer. As we get down into walking the stores four by four, that's how we likely look at it. Where should we expand, where do we have the opportunity to expand, what's our customer telling us that they want more of, how are they responding to our tests when we expand a category? That's really where we're going to get our answers.

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Laura Champine, Roe Equity Research - Analyst [47]

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Thank you.

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Operator [48]

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That will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Randy Guiler for any additional or closing remarks.

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Randy Guiler, Dollar Tree, Inc. - VP of IR [49]

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Thank you for joining us on today's call, and for your continued interest in Dollar Tree. Our next quarterly earnings conference call is tentatively scheduled for Thursday May 25, 2017. Thank you, and have a good day.

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Operator [50]

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