Good day, everyone, and welcome to the Dollar Tree, Inc.'s 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, Dana. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the fourth quarter and full year fiscal 2014. Our call today will be led by our CEO, Bob Sasser, who will share insights on our performance and an update on our business initiatives. Kevin Wampler, our CFO, will then provide a more detailed review of our financial performance and details related to our initial outlook for 2015. 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 on file with the SEC. We have no obligation to update our forward-looking statements, and you should not expect us to do so. Unless otherwise noted, all margin, net income and earnings comparisons presented today exclude the impact of the Family Dollar Stores acquisition-related costs for the fourth quarter and full year. Acquisition-related costs for the fourth quarter and full year are included in the adjustments column of our income statement included in today's earnings release. 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 Bob Sasser, Dollar Tree's Chief Executive Officer.

Thanks, Randy. Good morning, everyone. This morning, we announced Dollar Tree's results for the fourth quarter and full year fiscal 2014. For the quarter, same-store sales on a constant currency basis increased 5.6%. Total sales grew 10.8% to $2.48 billion. Operating income increased by $42.1 million or 12.1%, and operating margin for the quarter was 15.8%, a 20 basis point improvement from the prior year's fourth quarter. Net income increased 12.2% to $239 million, and adjusted earnings per diluted share increased 13.7% to $1.16 compared with fourth quarter 2013 earnings of $1.02 per diluted share. For the full year fiscal 2014, total sales increased 9.7% to $8.6 billion. Same-store sales on a constant currency basis increased 4.4% as a result of a 3.4% increase in traffic and a 90 basis point increase in average ticket. Operating income increased by $98.4 million to nearly $1.07 billion. Operating margin was a sector leading 12.4%, a 4 basis point increase versus the prior year. Net income was $645.6 million compared with $596.7 million last year, and adjusted earnings per diluted share was a record $3.12, an increase of 14.7% compared with $2.72 per diluted share last year. I'm extremely proud of our team's performance in the fourth quarter and throughout 2014. We have great momentum in our business as we serve a very loyal and growing customer base. In fact, in 2014, for the first time in company history, we exceeded 1 billion customer transactions in a year. Our results continue to validate that Dollar Tree is part of the solution for millions of consumers, as they strive to balance their household budgets. Our merchants continue to deliver product that exceeds customer expectations, and our store teams consistently provide a clean, fun and friendly shopping experience. Our focus continues to be on serving…

Thank you, Bob. As Bob mentioned, our adjusted fourth quarter earnings increased 13.7% to $1.16 per diluted share. Once again, we are very pleased with another quarter of strong same-store sales. Our constant currency 5.6% comp sales performance was composed of a 5% increase in traffic and a 0.5% increase in average ticket. Geographically, our performance was strongest in the Midwest and Southeast, as well as markets where we cycled significant weather disruptions from a year ago. In our previous 8-K, we announced our same store sales for the first 2 months of the quarter was 5.2%. January was our strongest comp month of the quarter as we're cycling a large number of weather-related store closings from the prior year. Starting with gross profit, our gross profit margin was 37.1% during the fourth quarter compared with 36.9% in the prior year fourth quarter, an increase of 20 basis points. The improvement was a result of the following: we gained 30 basis points of leverage in occupancy and distribution costs resulting from strong same-store sales; we experienced higher initial markup and reduced markdowns across many categories. The higher IMU reflects continued improvement in sourcing and the flexibility of our merchandise model. Overall, merchandise mix contributed to margin rate. However, it was offset by our commitment to provide greater value to consumers in order to drive traffic and capture share. We continue to be pleased with the results we are seeing. Freight cost as a percentage of sales increased, as domestic trucking rates were higher, reflecting the effects of industry-wide driver shortages. The increase was partially offset by lower diesel cost. Excluding acquisition-related costs, SG&A expenses were 21.3% of sales for the quarter, flat compared to the fourth quarter last year. Payroll-related expenses increased 25 basis points for the quarter as store…

Thank you very much, Kevin. Before going to Q&A, I want to make a few comments on our pending acquisition of Family Dollar. I'll tell you that we're more enthusiastic about the transaction today than when we originally announced our merger agreement in late July. We are extremely encouraged to see the overwhelming support from Family Dollar shareholders on their January 22 vote. Their approval was a crucial step in our moving forward with the transaction that will create a leading discount retailer in North America. I am pleased that throughout the process, Dollar Tree remained committed to its strategy, and was able to gain shareholder approval without increasing our offer. I would like to personally commend Family Dollar's team members on their efforts over the past 7 months. While their reported results have not been stellar, we acknowledge that they've been operating through unique circumstances with great uncertainty regarding the future of the Family Dollar business and we're eager to welcome Family Dollar associates to the Dollar Tree team. We appreciate the dedication and efforts of Family Dollar's associates throughout the integration planning process, and we look forward to working together to further grow and improve the Family Dollar brand. The strategic rationale for this combination is powerful. We are combining 2 very large companies with more than 13,000 stores achieving almost $19 billion in sales, and more than $2 billion in adjusted EBITDA. We're combining 2 established and respected brands in the most economically resilient sector of retailing. The discount retail sector has flourished through all economic cycles. We're combining 2 complementary business models across fixed and multi-priced strategies, creating the ability to serve a broader range of customers and geography. The Dollar Tree target customers is largely a suburban customer, while the Family Dollar customer is largely…

[Operator Instructions] And we'll take our first question from Michael Lasser with UBS.

This is Max Aggrey, on for Michael Lasser. As we kind of look at the full year and your operating margin, you guys have performed pretty solid gross margins. But as you're bringing on Family Dollar, how should we start to look at that, especially as you're going through the heavy lifting of the integration starting with banners and systems before we get to maybe some of the logistical synergies?

Max, this is Kevin. Obviously, we're not at a point to specifically speak to those type of metrics at this point in time. I mean, as Bob pointed out, there is a lot of integration work being done. The team's comprised of folks from both organizations working very hard, determining where the efficiencies can be gained and taking the best practices from both companies and looking at the way we can improve. So obviously, when we talk about -- we've talked about the $300 million run rate synergies at the end of year 3, and beyond what we've said today, we're not really ready to say anything else as it relates to specific numbers of the ongoing combined organization.

Okay. And also just with your online business, it seems like you guys have been doing a lot of great performance there with Dollar Tree Direct, and you mentioned that the demographics of that customer might be a little different. Could you maybe expound a bit on that?

Well, I think the demographics are Middle-America. It's people looking for value. It's -- in addition to that, it's small businesses, it's organizations that need larger quantities, that may need full-case quantities. Our average ticket on the online business is much higher. It's much higher than it is in our stores. So it's really a broad swathe of Middle America with small business and organizations and schools and individuals that just may need a little extra for a party or to see the great value that we have. In addition to that, Max, it's a terrific opportunity for us to connect with our customers directly, to understand who our customers are, to communicate through our Value Seekers Club to know who they are, what they want, what they want to buy, and to share with them our upcoming promotional events, what's new in our stores and just the Dollar Tree and Deal$ story. So it's -- really, it serves both means to sell product, to serve the customer, and also to continue to drive on the Dollar Tree brand.

And we'll take our next question from Anthony Chukumba with BB&T Capital.

I guess my first question was could you give us a little bit of an update on Deal$? I mean, I know you mentioned that Dollar Tree Canada had its strongest comp yet, and I just wonder if we could get just a little bit more color on how Deal$ performed in Q4.

Sure, I'll be happy to do that. We -- first of all, we end of the year with 219 Deal$ stores, and we don't break out our comps separately, but I would tell you that our comps were single-digit positive in our Deal$ stores. As the trend has been, we have a merchandise mix of both consumables and discretionary products that does more consumable than discretionary in our Deal$ stores. It's -- in the fourth quarter, of course with all of the holiday needs and all the holiday priority merchandise that we have in those stores, consumables were 56.4%, which is down a little bit. It's usually about 60%, and our non-consumables, up a little bit, 43.6%. So because of the holiday, we're able to sell a little more discretionary and seasonal product in our Deal$ stores. The basket, the average ticket basket, when we had items that are greater than $1, it was $15.62 and more than half of all transactions, 52.3% had items greater than $1 in them. So our customers are understanding the merchandise and are understanding the assortment. They're responding appropriately. Average unit retail, average retail of one item that they bought was $3.35 in our Deal$ stores, and the greater than $1 item represented 51% of the Deal$ total sales. I will tell you that our strongest sales growth comps by category in the Deal$ business in fourth quarter were Christmas textiles, cleaning supplies, household plastics, had a terrific quarter, and our electronics department, driven by phone and tablet accessories did very well in the fourth quarter.

Okay, that's really, really helpful color. And then just one quick follow-up, you mentioned the possibility of rebranding -- or I guess changing some Family Dollar stores to Dollar Tree and maybe even doing some vice versa. I mean, what about Deal$, I mean, would you consider any -- changing any Deal$ locations to Family Dollar or Family Dollar locations to Deal$?

I think so. We haven't run those models yet, what -- as opposed to -- what we've done is we've taken the -- our real estate model and ran the Family Dollar stores through them to especially on the lower-performing Family Dollar stores to see how they would perform as a Dollar Tree, and we've -- that's been our first priority, was to take a look at the Family Dollar underperforming Family Dollar Stores that would perform better as Dollar Tree stores, but Deal$, certainly, Deal$ to Family Dollar, Family Dollars to Deal$, certainly could be a part of the future also.

And we'll go next to Charles Grom with Sterne Agee.

Just when we look at 2015, how should we think about the puts and takes on the gross profit margin front and looking at even maybe into 2016, at what point do lower energy costs start to help you guys out on the sourcing side?

Chuck, I think, as we look at it in 2015, we've got -- thinking about the fact that as we've said, freight rates in general are going to continue to be higher for us in the sense that we took certain rate increases last year for certain distribution centers. We have some distribution centers this year that will take rate increases as well. Obviously, the offset is -- a partial offset is the fact that diesel is, today, running roughly $2.90 versus running, I think, last year in Q4 it was about $3.85. So it is down significantly which is the help to offset it. I think we look at the fact that we want to continue to drive sales. You've seen the -- we had some great success this year with investing in some brand products that -- our wow items to our consumers, the brands they know, brands that they love to be able to get at the dollar price point, and emergence has done a great job of sourcing those items and putting them in. So I think we'll continue to look at that at driving sales. I think on an overall basis, next year, I think again at a low- to -- to low, mid-single digit comp, we expect to see a little bit of leverage on occupancy, as we have traditionally, in the last few years. So I think, overall, depending on where freight comes out, I think we're looking at gross profit flat and to up or down 10 basis point is kind of the way we think about it. And again, it's always about managing through the business where there are items that our freights' up. We got to find ways to offset that within our business model, and that's the way we're always thinking about it.

Okay, that's great. And then just as a follow-up, in light of the Walmart news last week and even TJ Maxx this morning, I'm just wondering if you guys feel like you need to raise your wages for your associates to stay competitive, and if you factor any of that into your guidance for this year.

Well, Chuck, we watch the industry trends carefully, and of course, we're compliant with all the state and federal regulations. But I'll tell you, outside of complying with the continued changes in the regulations, we've made no plans for a sweeping change to our minimum wage rates. But we will continue to pay competitive wages, market by market, just as we always have done based on the prevailing rates. And as always, we'll work very hard to offset any wage increases and cost increases, in general, through increased sales and productivity enhancing initiatives that we've always been able to find.

We'll go next to Matt Nemer with Wells Fargo Securities.

First, there was a slight change in the language around your comp guidance versus the last few years. You've guided to low singles this year, a range of low single to low single to mid. Just wondering what drives the confidence in stronger sales growth this year if you could just point to the factors that drive that.

Well, that's a very subtle change in the language, but I will tell you, we factor in -- as always, we factor in the guidance, especially the first quarter when you're looking out across a whole year of guidance, and you don't know what's coming at you, so you're always looking at what -- where the rocks in the road may be. So you factor in what you know and what you could expect, and what possibly could happen, and you throw that against how you feel about the strength of the business and the momentum that you have going into the year and all the values that we know that we have planned, the promotions that we have planned. So I will tell you that, I guess, you could read that, as we are excited about our business. I can tell you that first quarter initiatives are more exciting than probably they've ever been. You've heard me say that before, but there really is an excitement about our business, our Dollar Tree business as we look forward into 2015. It's just the uncertainty out there. So what we've tried to do is sort of -- more than sort of. We'll try to just describe to you all the factors that we consider to go into our guidance, and at the same time, we'll tell you that we are absolutely positioned, dead in the crosshairs of where the value customer, and they're all value customers now, but where the value customers is going, and we're more relevant than ever. I can't tell you that I can -- I don't have any empirical data, but the wind feels a little bit to our -- back in the value sector right now with lower gasoline prices and lower energy prices and lower diesel fuel prices, and there's just a lot of lowers there that tend to help us as we accelerate our momentum going into the year. That having said, we would be remiss if we didn't also point out the uncertainties that we see out there. So our guidance is our guidance. I'd like for you to believe it. I'd like for you to -- we have a -- I've always tried to earn credibility with our guidance and to factor in all that we know the best we can.

We're happy to see the mid single comment in there. And then just secondly, following up on gross margin, if we just isolate the freight-related components, Kevin, how do you think that, that will play out in terms of just the driver shortage versus the gas price benefit and then, I guess, versus any port delay cost this year if we exclude investments in wow brands, et cetera, how does that play out in 2015?

I think just to give you some direction, so if we think about inbound and outbound rates, and then there's obviously the fuel component, the actual inbound and outbound rates are probably about 80% of the overall cost, with the fuel piece being about 20%. So obviously, as we've talked about rates going up, fuel being a smaller piece, but going down, so realistically, if rates continue as we expect them, we will not be able to offset all of that rate increase with the fuel decrease as we see it right now. So that's why we've said within the guidance, we project that we'll -- there is headwind from freight cost throughout the year.

We'll go next to Paul Trussell with Deutsche Bank.

This is Tiffany Kanaga, on for Paul. Would you update us on your long-term store growth potential as a standalone entity and also as a combined one? I know you outlined the thousand stores in Canada, but any additional color would be helpful.

Well, we've always, for years and years, we've said 7,000 Dollar Tree stores, and I think that was probably if we were to update it today, we would say that that's probably on the low side, but 7,000 Dollar Tree stores in the U.S. Our Deal$ brands adds to that. We've never quantified it, but our Deal$ brand is in addition to the 7,000 Dollar Tree stores. And in Canada, 1,000 Dollar Tree Canada stores is -- we feel very good about growing over time to 1,000 stores in Canada. The combined growth, all I can tell you there, so far, since we have not closed on the Family Dollar deal is what's in the public documents out there that you've seen, as well as everyone else, I guess. And Family Dollar said, I think, 15,000 stores is their potential. So if you take the 15 and add the 7 plus, the 1, 23,000 stores, sound like might be the right math on that. By the way, I think the combination of Family Dollar and Dollar Tree is -- I've said it before, it's complementary. One does not trump the other. So we can continue to grow the Dollar Tree brand in addition to growing the Family Dollar brand at the appropriate pace over time.

We'll go next to Dan Wewer with Raymond James.

Following up on your comments on format optimization, do you think that the Family Dollar locations are sufficient, that they could generate the same type of sales and profit productivity as a Dollar Tree, and also, if this will give Dollar Tree an opportunity to start going into smaller markets that historically you sidestepped.

Let me see if I understood the question, but what we've done on format optimization, we've taken the Family Dollar locations and we've run them through our real estate model, as if we were looking for a new Dollar Tree store, and our real estate model then predicts the success, the productivity of that store format. We started with the lowest performing Family Dollar stores, I forget how many hundred, but it was hundreds, and we've run those through our models to come up with the initial number of stores that would benefit, we think, from moving from a Family Dollar brand to the Dollar Tree brand. In other words, the stores would be more productive and more profitable likely because they serve -- they are more focused on the appropriate customer. Some of the Family Dollar Stores that moved into the suburban markets over recent years are in that group. They don't do quite as well in the suburban markets. Dollar Tree does much better in the suburban markets. So that's how we looked at it. We haven't really looked the other way yet because until we close, we won't have access to all of that data on the Family Dollar side to be able to run the Dollar Tree Stores through the Family Dollar data but...

But it's your thought that the underperforming Family Dollar Stores and suburban locations, Dollar Tree type locations, could generate the Dollar Tree profit metrics?

Yes, that's right. That's exactly right.

That's great because, I mean, there's a huge difference between the 2. Kevin, quick question for you. You talked about excluding acquisition costs and the guidance. Does that include -- excluding the interest expense related to the acquisition?

Yes, it is. So you would have seen, for example, in this quarter in the table, the income statement, you saw the -- in the adjustment column, there was $45.8 million of interest-related cost related to the financing that was excluded, so yes.

And we'll take our final question today from Dan Binder with Jeffries.

This is John Gugliuzza, on for Dan. My question is on SG&A. It was flat for the quarter despite the 5.6% comp increase driven higher -- by the higher incentive compensation. So we're a little bit surprised to see that. As you guys look to next year, can you give us any guidance on where you see the comp leverage point, particularly in the fourth quarter?

Yes, I think one thing I would speak to as it relates to the fourth quarter is the fact that if you look at the quarter we're comparing against last year, last year's comp, a year ago fourth quarter comp was 1.2%. So obviously, we underperformed. Obviously, much of that was weather-driven at that point in time, but it affected the incentive compensation line items. It was a benefit basically to the P&L at the end of the day. This year, we obviously over-performed. So there is a dichotomy between the 2 quarters we're comparing at the end of the day from an SG&A standpoint. So I think that's the biggest driver of why we see that. You would notice that, for the year, we still leveraged SG&A by 40 basis points for the year on our 4.3% comp. So I don't think the leverage point necessarily has changed overall as it relates to SG&A. I think it was much more of a comparability issue year-over-year for that quarter as it relates to incentive-based comp.

Okay, and then just one more question, another question on gross margin. Just regards to your strategy to invest more on merchandise, we were -- gross margin inched up a little bit this quarter. So I'm just kind of wondering if there's been a little bit of a shift in the strategy or is it just a smaller kind of component of the movement in gross margin now. How should we think about the -- your strategy in investing in merchandise going forward?

Well, that ebbs and flows, but the -- what you saw there was a result of fourth quarter. Fourth quarter always has opportunities to show more value on higher margin products with more of the discretionary product. Our discretionary product grew at a little faster rate than our consumer product in the fourth quarter, for example. So while we drove a terrific comp, we drove more of the comp with discretionary variety products. So that's a good thing. But I wouldn't read anything on to the annual numbers, as we've always had the strategy of as we got better cost or better prices, reinvesting some of that, not taking it straight in the gross margin, but reinvesting it to more value for the customer and that's what you see when you see the consistency of our gross profit over the years. So no change in the strategy. I think what you see in there is just the fourth quarter effort and initiative. Are there any more questions?

And that does conclude today's question-and-answer session. At this time, I'd like to turn the conference back to Mr. Randy Guiler for any additional or closing remarks.

Okay, and I just want to remind everyone that the guidance that we're providing for 2015 does not include any share repurchases. And thank you for joining us on today's call and for your continued interest in Dollar Tree. Our next quarterly earnings conference call is scheduled for Thursday, May 21.

Again, that does conclude today's presentation. We thank you for your participation.