Dollar Tree, Inc. (DLTR) Q4 2017 Earnings Report, Transcript and Summary

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

Thank you, Melanie. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the fourth quarter and fiscal year 2016. 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. [Operator Instructions] Now I will turn the call over to Bob Sasser, Dollar Tree's Chief Executive Officer.

Thanks, Randy, and good morning, everyone. As you know, this morning, we announced our results for the fourth quarter and full year fiscal 2016. Enterprise total sales for the fourth quarter increased 5% to $5.64 billion, and 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, and 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 (sic) [ $586.5 million ], 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 midpoint 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're 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 3-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 fiscal 2016, we opened 584 new stores, and in fiscal 2017, 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 into 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 CAD $1.25, just as we are in the U.S. 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 contract 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.

Thank you, Bob, and good morning, everyone. As Bob commented, we're 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 enhancements 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 is 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 50%; 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. And 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 the Family Dollar included electronics, snacks and beverage, candy, men's apparel and cough and cold supplies. Our comp performance is 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. And 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 price they need for everyday basics and holiday wants. While we have more to do here, we're 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 Way 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 Way 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 value 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 be the best at delivering value to our customers. They are unique in many ways and often underserved. 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're 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 Dollar Family Dollars; and we rebannered 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, and we ended the fiscal year with over 14,000 stores, 14,334, 6,360 Dollar Trees, and 7,974 Family Dollar Stores. For fiscal '16, 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've mentioned, we're pleased with our progress, but there is much work and opportunity that lies ahead of us. I'll now turn the call over to Kevin to provide more detail on Q4 performance and our initial outlook on Q1 and fiscal '17. Kevin?

Thank you, Gary, and good morning. Total sales for the fourth quarter grew 5% to $5.64 billion. This was at the midpoint of the guidance range of $5.59 billion to $5.69 billion. Dollar Tree segment total sales increased 7.9% to $2.9 billion, and 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 to 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 costs due to higher initial mark-on and favorable trade costs and lower markdowns 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 markdown 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 of 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% 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 cost 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, and 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. Nonoperating expenses for the quarter totaled $88.8 million, which was comprised primarily of net interest expense and $11.7 million of acceleration of amortizable noncash deferred financing costs related to our debt prepayment 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 noncash 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're 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 fiscal 2017, 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 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 last year. For fiscal 2017, we expect consolidated depreciation and amortization to range from $610 million to $630 million. This includes $66 million for fiscal 2017 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 onetime or unique items that impacted our 2016 earnings by quarter. In Q1 2016, we had a onetime $0.09 per share benefit in our tax rate related to state tax planning. In Q3 2016, we had a onetime $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. And lastly, in Q4 of 2016, we incurred $0.03 per share in expenses related to our debt prepayment. Our initial outlook for fiscal 2017 includes the following assumptions. Fiscal 2017 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 2 quarters, we will continue to experience a higher-than-normal degree of cannibalization to Dollar Tree comps from our rebanner 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 1 through 3 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 fiscal 2017. 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 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 onetime 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 fiscal 2017, we're 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 fiscal 2017, as previously noted. I'll now turn the call back over to Bob

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 2 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 postholiday 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're 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're 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 that -- 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 products, 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're 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 $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're now ready for questions.

[Operator Instructions] We'll go first to Matthew Boss with JPMorgan.

So Bob, on same-store sales, what's the mind-set around including flat at the low end of the flat to low single-digit guide for this year? I guess any change in the competitive landscape? Or any change in the way that you view the Family Dollar productivity opportunity?

Yes. Matt, we're extremely excited about the opportunity productivity increases in Family Dollar and in Dollar Tree. But 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. So 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. So 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.

That's great. And then just a 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?

Well, there's still plenty of opportunity. There are some headwinds that we have in our ocean freight and some of the things that Kevin called out, with diesel fuel 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're in charge of our gross margin at Dollar Tree. We go to market with 2 things in mind, and our buyers are looking for the best value for the dollar for the customers at a margin we're willing to accept. So the -- we decide, sometimes it's -- we take the opportunities 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. So I feel really good about our Dollar Tree margin. Again, this is our 30th anniversary. It's 30 years. Everything is $1. Every increasing improvements in the business, still hitting some high watermarks at 12.9% operating margin, and I think we can continue that.

And we'll go next to Karen Short with Barclays.

I'm wondering if you can give an update on kind of where you are on synergies to date and costs incurred to achieve the synergies. And then just an update on whether $150 million is still the right run rate to think about for 2017.

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, and we kind of broke that out. Yes, we kind of broke it out as $75 million the first year, $225 million by the end of the second year and $300 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 onetime cost to achieve, again, we spoke a little bit to that last quarter. And 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 rebanners we've done, the 300 rebanners as well as the 200 Deals rebanners; 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. But -- so overall, 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.

Great. And just to follow up on the first quarter guidance. I guess the earnings guidance was a little lighter than consensus. Is there anything just to point to there?

Yes. I don't know if there's anything specifically to point to. I think as we look at it, a couple of things. One, Q1, from the diesel cost perspective, it is the biggest change quarter-to-quarter. So the diesel cost is about $0.02 of headwind in basically Q1. So that's bigger than it is in any other one. And again, I do 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. But that's probably the biggest thing I would point out is diesel costs. And otherwise, I think, we feel pretty good about the number we've been able to put out there.

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

You broke into positive comp territory for Family Dollar this quarter. And as you continue to work on improving the store format, the -- 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 kind of stable going forward?

Scot, this is Gary. The way I think about the business is we got to a slight positive comp in Q4, and that was with a core 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'll 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. And then maybe the third piece is really around the merchandising and the assortment. So as we think about what a Family Dollar customer needs and wants, those are the longer-term enhancements we'll see as we go through buying cycles, both on imports and our domestic products. So I take a look at the year. And we're a retailer. We're always bullish. 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 in the business to get us to a consistent growth trajectory on operating margin.

And Gary, given some of the competitive commentary, whether it's Walmart, Target, Dollar General, et cetera, do you think there is 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?

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. It 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 4 walls, and those are the things that we're focused on to stay in front of for 2017.

And we'll go next to Brad Thomas with KeyBanc Capital Markets.

I wanted to follow up on the -- some of the Family Dollar questions and hoping you could just 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.

Brad, thank you, and 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. And where are we? Well, 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. And our efforts to catch up on some of the deferred maintenance in 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. And I commented it on it, but for our customers, it really revolves around are we first-of-month ready at Family Dollar. And that's a very important focus for us to gain consistency with our customer and it tends to show up with our first-of-the-month business and our share of SNAP that we take. And so 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, and that's just as important when we're talking about the stores that serve their neighborhood. So I'm encouraged with where we're at, more to be done, but it's consistent message and focus throughout the organization right now.

And we'll go next to Paul Trussell with Deutsche Bank.

Just wanted to inquire about Duncan's hiring, if you can touch on that. And then also, if possible, could you just describe in a little bit more detail maybe the expectations on both comps and margins per banner? So to the extent that, how should we be thinking about comps for FDO versus Dollar Tree? Is it 200 basis points spread between the 2 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? And similarly, on margins, is there more opportunity or more pressure at the Tree segment versus FDO?

Paul, this is Bob. I'll take the first part. And 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 already -- 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 -- that 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. And 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. And 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 a 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. So I was real pleased to bring Duncan onboard. Duncan has been down there just a short period of time. But I will tell you, he is -- he's stepping in. He started out running. And 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. So we're very, 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. And 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. So that's the -- that was sort of the trail of how all this began, and we're really pleased to have Duncan onboard. We're also pleased to have Gary in the new role. I let Kevin to speak to the second part of the question.

From a big picture perspective as regards to comps, obviously, from a Dollar Tree side of the equation, we expect the cannibalization we've seen from the rebanner process to dissipate as we go through Q1 and Q2 and really be pretty much done by the end of Q2. So the back half really shouldn't have any headwinds per se from the rebanners, 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 tell you, 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. Doesn't mean we believe that they're not going to comp positive and be able to be a meaningful contributor at the end of the day. So 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 2 segments as well. So 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 kind of 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 -- or 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 markdowns, as a percent of sales, in our Family Dollar banner. We're going to continue to see a little bit of geography change from the standpoint on the Family Dollar banner, and we talked about this last quarter in the sense of our process where we're getting our coop dollars net and our first costs as opposed to offsetting advertising. So you have a benefit in gross profit. You actually see advertising expense and SG&A go up. But that's kind of a geography difference. And then we know some of those improvements are going to be somewhat offset by the higher freight cost that we've already talked about. But in general, we're expecting gross profit to improve. On the SG&A side, I think there's -- expecting flattish to maybe slight improvement. I think the headwinds are -- in SG&A are going to be the pressure on store wages in both banners. And 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, 4 or 5 years, realistically. And then as well in SG&A, we do have the advertising that I spoke to. That'll 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 midpoint of that range would be $620 million, which compares to last year's actual of $637 million. So depreciation is actually going lower, so those kind of things. As we look at that then, if you look at our operating income, kind at that midpoint of our guidance, you'd be looking at operating income of approximately 8.8% to 8.9%, which is compared to 8.23% (sic) [ 8.2% ] that we reported on the press release today. So at the midpoint, still nice increase in the overall operating income as we go forward. So those are some of the moving pieces, and the big picture as we move into 2017.

We'll go next to Dan Binder with Jefferies.

I just had a 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 go up a decent amount over the last several quarters, and the comps have been slightly negative to slightly positive more recently. And 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?

Dan, Gary. I think one of the things you sort of point out with the question is the synergy does give us some flexibility in our sector. We certainly monitor all the price checks, like everyone else, and what's happening across, not just to our sector, but also the other channels as well. And 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 that, points to the way we show our offers to a Family Dollar customer. And so we do see a customer that shops differently. I mentioned first of the month before. Clearly, that's a big driver for us. And so what's on shelf and end caps and either it's on sale or a price drop is how we're approaching it. So looking forward, we're 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, 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, and that's how we're thinking about it starting off the year.

And then just a follow-up, a different topic. But again, a philosophical question. I know you can't say a 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 think it would be smarter to just keep that level and engineer the product packaging and count, so forth, to keep it at that level?

Well, Dan, again as I said in my prepared remarks, it hasn't been passed yet. And 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, and 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, it could be a real issue for the consumer. But as far as retailer, we're -- just like everyone else, we will respond accordingly. And I will tell you this, at Dollar Tree, we are -- for 30 years, we've been $1. You talked about the price point. I've been asked that question for a long, long time on other issues as cost changes, as expense has changed, as the markets changed, as inflation, deflation and the like. And we are able to manage that, because we're able to manage our assortment at Dollar Tree. As long as the dollar is the unit of currency, I believe we can -- and we can offer the best value, then we've got a business. So let's wait until we get there. Let us see if it's passed. And if passed, that how -- what the rules are, and then we'll respond accordingly. But I believe we have as much a right as anyone to respond and run a great business going forward. So it'll be different, but let's see what the rules are first.

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

Can you talk about the new -- the 300 new Family Dollar Stores you're opening in FY '17? And what will be different about these stores compared to the Family Dollar stores you inherited? Perhaps, any commentary about rural 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.

Dan, this is Gary. Let me take a swing at it first. We're excited to have 300 stores in the renovations. And 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. And you're going to see some things that both drive traffic and enhance the customer shopping experience, especially on the discretionary side as well. And I'm not going to give the blueprint of everything that you'll see out there, but I -- the model will be a small box, still. We certainly know how to run our box, both in urban and rural. And what we're going to drive is really the categories and adjacencies that make sense in a Family Dollar world. And 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. And we certainly have the pieces to make that a better shopping environment for our customer, and some of that can be our consumables and frozen food. And on the margin pieces, so the elements that we do on seasonal, we're not -- 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. And the difference that we really have is we still have apparel, and 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. And so those are some of the items that, when you combine with the basic elements, our Smart Ways to Save that will sort of 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'll see that split, maybe not evenly between the 2 locations, but it'll be fairly close on both.

Okay. And then as a second question. Most of the Family Dollar Stores that we have visited, not all, but most, the in-store standards are continuing to look a lot better than they did a year ago, yet 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 Walmart on the consumable items with -- the gap widened because of what Walmart is doing. With the addition of Duncan and his background at Walmart, I believe, 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?

Well, I'm counting on it. But I'm clearly happy with Duncan as a partner, number one. And Duncan is going to help us tremendously, I would tell you that. And if I kind of echo what Bob said, his experience doesn't need me to polish it up, but...

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

He's going to be President of Family Dollar. He's going to have as strong a voice as anyone at the table. Here's what I'd like to think about. And listen, the price checks, I get more than everybody out in the field, I'm sure. The way I take a look at the price checks and either it's 10%, which I don't know where you're checking, but we react accordingly. And 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 launched our customer savings on price drop, which are some of the things they buy most often. So it's a combination of all those things that we go to market with that react to a Family Dollar customer. And so we're going to be mindful where Walmart is and certainly anybody in our sector, but we have more than one tool to go to show our customer value in our store. And that's how we think about it.

And we have time for one more question. We will go to Laura Champine with Roe Equity Research.

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?

Well, I would say, Laura, that as strong as they have been, in my opinion, the mix at Dollar Tree -- we have 2 different banners here. So we're a lot more discretionary on the Dollar Tree banner than in the Family Dollar banner. My expectation is it will continue to grow both discretionary and consumable, but the mix is going to be pretty much, I think pretty much the same. At Family Dollar, I think there's an opportunity to sell a little more discretionary. The -- 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 be -- have great values for our customers on all the things that they need. So 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 and 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. So it's a big question. It's a good question, but it's -- at the high level, that would be my answer. As we get down into walking the stores, 4 by 4, that's how we like -- we look at it. And where should we expand. Where do we have the opportunity to expand. What's our customer tell us that they want more of. How are they responding to our tests when we expand a category, and that's really where we're going to get our answers.

And 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.

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, March -- I'm sorry, Thursday, May 25, 2017. Thank you, and have a good day.

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