Dollar Tree Inc

NASDAQ:DLTR

Earnings Call Transcript 2017-Q4

[Operator]

Good day and welcome to the Dollar Tree Inc. Fourth Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I’d like to turn the conference over to Mr. Randy Guiler, Vice President, Investor Relations. Please go ahead, sir.

[Randy Guiler, VP of IR]

Thank you. Good morning and welcome to our call to discuss Dollar Tree’s performance for the 14 week, fourth quarter and for the 53 week fiscal year 2017. On today’s call with me will be CEO, Gary Philbin and CFO, Kevin Wampler.

Before we begin, I'd 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 today’s press release, most recent 8-K, 10-Q, and 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.

At the end of our prepared remarks we will open the call for your questions. Please limit your questions to one and one follow-up if necessary.

Now I'll turn the call over to Gary Philbin, Dollar Tree's Enterprise President and Chief Executive Officer.

[Gary Philbin, Enterprise President and CEO]

Thanks, Randy, and good morning, everyone. This morning we announced our results for our 14 week fourth quarter of fiscal 2017. Sales increased 12.9% to $6.36 billion. Our consolidated same-store sales increased 2.4%. By segment, comp sales from a Dollar Tree Banner increased 3.8%. For the Family Dollar Banner comp sales increased 1%.

This represented our 40th consecutive quarter of positive same-store sales for Dollar Tree Banner. That’s every quarter for the past 10 years. And it also represented our third straight quarter of positive comps at Family Dollar as we continue to make progress on rebuilding the business.

Our Enterprise gross margin rate improved 90 basis points to 33.0%. Operating income increased 30.5% to $765.6 million and our operating margin rate improved 160 basis points to 12%. GAAP earnings per share increased 221.3% to $4.37. There were multiple discrete items during the quarter including the impact of Tax Reform, which Kevin will share more detail on in his prepared remarks.

Our adjusted EPS was $1.89, a 39% improvement from prior year's quarter and at the top end of our $1.80 to $1.89 range of guidance. I’m proud of our team's performance in the fourth quarter and our results for 2017. We have a dedicated team of associates across each of our business segments that drive our customer engagement and deliver the following results.

For Dollar Tree, the banner delivered a solid 3.8% comp, along with a 50 basis point improvement in its sector leading operating margin. The Family Dollar banner delivered its 3rd consecutive quarter of positive same-store sales along with a 6.8% operating margin, a 280 basis point improvement from Q4 last year.

Our Dollar Tree Canada team delivered another solid quarter of strong sales coupled with improved margins and leverage expenses. And our Dollar Tree Direct business delivered double-digit comp sales in both sales and visits your Web sites.

In our Dollar Tree banner for the fourth quarter, our top performing categories were our Christmas assortment, which had just a terrific holiday season, candy, snacks, beverage, household consumables, beauty and eyewear. Our sales performance was very balanced with discretionary slightly outperforming consumables, both of them comped up more than 3%.

All three months comped positively with November being the strongest month, and geographically Dollar Tree's same-store sales growth was strongest in the Southwest, West and Midwest, and all of our zones delivered positive comps greater than 2%. Customers continue to be thrilled with Dollar Tree's unique fixed price point concept and the business continues to be strong, consistent and growing.

As I've mentioned, this is the 40th consecutive quarter of positive same-store sales and our operating margin of nearly 17% for the quarter continues to lead the value sector. Our fourth quarter performance again validates the strength of the Dollar Tree brand. Customers love the value and convenience of shopping at Dollar Tree.

We are very pleased with the traffic and sales results, our merchandising assortment in the flow of inventory. Our business model continues to focus on our customers wants and needs and our shopping experience is unique. Customers find it compelling as we get compared to other retailers.

In our Family Dollar banner for the fourth quarter, our top performing categories included our refrigerated and frozen food sections, school and office supplies, and bedding. Our comp performance was again driven by consumables and comp sales cadence through the quarter was positive each month, November and January being the strongest months.

Geographically, Family Dollar same-store sales growth for the quarter was strongest in our West, Mid-Atlantic, Mountain West, and Southwest zones. And importantly, all eight of our major geographic zones delivered positive comps. Since the acquisition, much of our focus at Family Dollar has been around our table stakes initiatives to improve store standards.

Feedback continues to come from our shoppers that indicate they’re seeing cleaner stores, greater values on the items our customers buy most often, improved product assortments, more consistent in stocks, and better customer service in our stores. The combination of value and convenience is the foundation for the Family Dollar business. Our stores are the place to stop for basic fill-in needs for our customer shopping list.

The nearly 8,200 Family Dollar stores across 46 states are conveniently located in markets and neighborhoods, were many of our primary customers live, work, and shop. Our stores are easy to shop and provide terrific values in every aisles. We deliver our value message to our customers through our Smart Way to Save program, and whether you visit a Family Dollar store, view a marketing circular or check in our Web site, you will see the consistent value messaging.

The Smart Ways to Save includes our EDLP pricing for everyday value, price drops that reflect meaningful value on promotional items throughout the store. Our Dollar well, which drive surprise and value and opening price point in our stores. In Compare and Save, which calls on great values on our private brands.

And supporting our Smart Ways to Save is a smart coupon program, which was launched chain wide on Labor Day of 2016 and after just 18 months we've more than 5.3 million customers that have opted in to receive Smart coupons. Our recently introduced Family Dollar mobile app makes it easier for customers to use Smart coupons.

We’ve seen more than 2 million customers download the app and we're receiving strong reviews about the android and iOS systems. Visit to the Web and app have doubled from the prior year. I’m very pleased with the progress on upgrading our private brand assortment in the stores. These private brands are being developed to provide national brand comparable quality and terrific values to support the Compare and Save component of our Smart Ways to Save program.

Our customers know they can count on the quality with our 100% customer satisfaction guarantee. Examples of changes we've already made in our consumables, aisles include the Family Gourmet brand that’s been replaced with such brands as Catawba Candy Company, eats and salty snacks and cookies and Chestnut Hill and grocery prepared and some refrigerated frozen food items.

The Family Dollar brand has been retired in household products such as laundry, cleaning and paper and replaced with our new HOMELIME brand. We've introduced two new brands to auto and hardware, Driver's Choice and Tool Bench. And within our health and beauty assortment, we’ve redesigned our look for Family Wellness, [indiscernible] brands.

We’ve also added some new brands such as Nature's Measure and Vitamins, Daxton in men's personal care. In 2018, the next phase of our private brand initiative we will focus on discretionary brands and home, housewares and general merchandise.

During the fourth quarter, we completed another 75 Family Dollar store renovations, bringing our 27 total to 377. We continued to be very pleased with the initial results we're seeing in these newly renovated stores, and especially about the feedback we’re receiving from our customers and store teams.

Elements of the improved store layout, include better shopping [technical difficulty] and more productive end caps, expanded beverage and snack, including immediate consumption coolers near the checkout, added assortment of food and coolers and freezers, updated air care assortment, expanded adult beverage in select stores, a shopper friendly power alley to promote Dollar Well items and a faster checkout for our customers.

Besides the renovation stores, all of our store teams are working hard to be the neighborhood store of choice for the fill-in shopping needs of our Family Dollar customers that typically live, work, and shop near our stores.

For Canada, our highlights include our focus on running great stores. Our merchants continue to do stores exceptional values and product. Our operators are delivering on brand standards in our stores. The discretionary side in particular of our Canadian business continued to perform well. Our top performing categories include HPC, candy, toys and crafts.

We continue to be focused on our goal to be recognized as a leading single price point retailer in Canada at a CAD$1.25 just as we are a $1 in the U.S. We currently operate 225 stores in Canada. Continue to see the opportunity for our thousand store vision of stores over all the Canadian provinces over time.

At Dollar Tree Direct, our web presence and selling site for the Dollar Tree banner provides an opportunity to enhance our customer base, drive incremental sales, extend brand awareness, and encourage store visits. It was another productive and profitable quarter for Dollar Tree Direct as we experienced double-digit increases in sales and site traffic.

More than half of our traffic to dollartree.com was from mobile devices and our online videos earned more than 2.4 million views during the quarter, highlighted by our new private videos associated with our million dollar brands. In December we launched our first ever Tacky Sweater contest which promote our holiday decorations and wearables of course at the incredible price of a $1.

In January, we distributed our 2018 Spring catalog directly to key customers and to all of our Dollar Tree stores touting our spring, dinnerware, Easter, spring cleaning and lawn and garden products. Our customers can now find great values, new items and seasonal excitement at dollartree.com and familydollar.com and even more offers just for them with the new Family Dollar app.

Now turning to real estate in the fourth quarter, we opened up a total of 137 new stores, 51 Dollar Trees and 86 Family Dollar. We relocated or expanded 8 stores for Dollar Trees, for Family Dollars. We renovated 75 Family Dollar stores as part of the renovation initiative for a total of 220 projects during the quarter. We also have freezers and coolers into 77 Dollar Tree stores during the fourth quarter, now bring our total to 5,207 of Dollar Tree stores of freezers and coolers.

During the quarter, we closed 46 stores, 5 Dollar Trees, 41 Family Dollars and we ended the year with 14,835 stores, 6,650 Dollar Trees, 8,185 Family Dollar. For 2018, our real estate plans include 650 new stores, 350 Dollar Tree and 300 Family Dollar. Renovations of at least 450 Family Dollar stores, relocations or expansions of approximately 100 stores, and approximately 50 re-banners from Family Dollar to Dollar Tree. Cooler and freezer expansions in 500 Family Dollar stores and the addition of adult beverage to 700 [indiscernible] stores and adding freezers and coolers to 500 new and existing Dollar Tree stores.

We are pleased with our results and enthusiastic about the opportunities ahead of us.

I will now turn the call over to Kevin to provide more detail on our fourth quarter performance and our initial outlook for Q1 in fiscal 2018. Kevin?

[Kevin Wampler, CFO]

Thanks, Gary, and good morning. Sales and earnings were favorably impacted by the addition of a 14-week in the fourth quarter, consistent with the 53-week retail calendar. The extra week contributed $406.6 million to sales and approximately $0.21 to earnings per share.

Total sales for the fourth quarter grew 12.9% to $6.36 billion, within our guidance range of $6.32 billion to $6.43 billion. Dollar Tree segment total sales increased 14.5% to $3.32 billion, and Family Dollar segment total sales increased 11.1% to $3.04 billion. Enterprise same-store sales increased 2.4% on a constant currency basis or 2.5% when adjusted for Canadian currency fluctuations.

On a segment basis, same-store sales for the Dollar Tree banner increased 3.8% or 3.9% when adjusted for currency fluctuations and the Family Dollar banner increased 1%.

Gross profit for the combined organization increased 16.3% to $2.1 billion for the fourth quarter of 2017 compared to the prior year's quarter. As a percentage of sales, gross profit margin improved 90 basis points to 33% versus 32.1% in the prior year's quarter.

Gross profit margin for the Dollar Tree segment was 38% for the fourth quarter, a 50 basis point improvement compared with the prior year's fourth quarter. Factors impacting the segment's gross margin performance during the quarter included lower occupancy cost as a percent of sales due to the leverage from the extra week of sales and comp sales gain and lower shrinking markdowns compared to the prior year's quarter. These were partially offset by higher freight costs.

Gross profit margin for Family Dollar segment was 27.6% during the fourth quarter compared with 26.3% in the comparable prior year period. The 130 basis point improvement was primarily due to lower markdown expense as a result of a continued focus on improving our promotional and clearance markdowns strategies and lower occupancy cost as a percent of sales primarily due to the extra week.

Consolidated selling, general, and administrative expenses as a percentage of net sales in the quarter improved 70 basis points to 21% from 21.7% in the same quarter last year. This includes a $35 million recovery from Sycamore Partners related to our Dollar Express settlement and includes $12.6 million of expense related to a change in reporting our Dollar Tree workers compensation reserves on an undiscounted basis. Excluding the two items noted, SG&A as a percent of sales improved 40 basis points for the quarter.

Fourth quarter SG&A expense for the Dollar Tree segment as a percentage of sales was consistent with the prior year at 21.1%. Excluding the $12.6 million of expense related to workers compensation noted previously, SG&A improved to 20.8% of sales. The improvement was driven by lower depreciation and leverage from the sales from the 14th week partially offset by higher store payroll costs.

SG&A expense for the Family Dollar segment as a percentage of sales was 20.8% compared to 22.3% in the prior year's quarter. The 150 basis point improvement was a result of 120 basis points positive impact from the $35 million receivable impairment recovery, lower repair and maintenance costs and lower depreciation cost, partially offset by higher incentive compensation and a retirement plan contributions, and increased advertising costs.

Operating income for the enterprise increased to $765.6 million compared with $586.5 million in the same period last year. Operating income margin improved 160 basis points to 12% for the quarter from 10.4% in last year's fourth quarter. Excluding the previously mentioned net benefit of $22.4 million, adjusted operating margin was 11.7%.

Operating income margin for the Dollar Tree segment improved 50 basis points to 16.9% when compared to the prior year quarter. Operating income for the Family Dollar segment increased $95.2 million to $205.6 million, a 280 basis point improvement as a percentage of sales when compared to the prior year's quarter. Excluding the Dollar Express receivable impairment recovery, operating income increased 160 basis points to 5.6%.

Non-operating expenses for the quarter totaled $74.1 million, which was comprised primarily of net interest expense of $81.6 million partially offset by $7.5 million of income for recognition of the completion of all requirements for the forgivable promissory note issued by the State of Connecticut for the construction of our Windsor, Connecticut distribution center in 2012.

Our effective tax rate for the quarter was a benefit of 50.4% compared to an expense of 35.3% in the prior year period. The current year benefit is the result of the Tax Cuts and Jobs Act, which lowered the federal corporate tax rate from 35% to 21% and made numerous other law changes as of January 1, 2018.

Our fiscal 2017 include a 34 calendar days in calendar year 2018. Therefore the overall 2017 statutory rate for the year was 33.7%. The effective tax rate also included a $562 million non-cash benefit resulting from the re-measurement of our net deferred tax liability, to reflect the lower statutory rate. The total benefit from the Tax Cuts and Jobs Act to the fourth quarter was $583.7 million.

For the fourth quarter, the company had net income of $1.04 billion or $4.37 per diluted share compared to the reported net income of $321.8 million or $1.36 per diluted share in the prior year's quarter. Last year's Q4 reported earnings of $1.36 per share included $0.03 of expense for the write-off of amortizable non-cash deferred financing costs incurred during Q4 of 2016.

The company estimates that the 53rd week in fiscal 2017 represented a benefit of approximately $0.21 per diluted share. Adjusted EPS for the quarter was $1.89. Today's press release includes a reconciliation of non-GAAP financial measures for the details on the adjustments.

Looking at the balance sheet, combined cash and cash equivalents at year-end totaled $1.1 billion compared to $866.4 million at the end of fiscal 2016. Our outstanding debt as of February 3, 2018 was approximately $5.7 billion, a decrease of $644 million from the prior year-end.

On March 1, 2018, the company prepaid its $750 million of 2020 Notes. The prepayment included a redemption premium of $9.8 million, which was included in interest expense in the fourth quarter.

Inventory for the Dollar Tree segment at quarter end increased 12.1% from the same time last year, while selling square footage increased 4.8%.Inventory for selling square foot increased 7%. We believe the current inventory levels are appropriate to support the earlier Easter selling season, scheduled new store openings and our sales initiatives for the first quarter.

Inventory for the Family Dollar segment at quarter end increased 9.4% from the same period last year and increased 6.5% 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 $182.8 million in the fourth quarter of 2017 versus $113.2 million in the fourth quarter of last year. For fiscal 2018, we're planning for consolidated capital expenditures to range from $875 million to $890 million. Capital expenditures will be focused on 650 new stores, 100 remodels along with the renovation of 450 Family Dollar stores.

The addition of frozen and refrigerated capability to a total 500 new and existing Dollar Tree stores, the expansion of frozen and refrigerated capability to 500 Family Dollar stores and the addition of adult beverage to 700 stores, IT system enhancements and integration projects, installation of LED lighting in approximately 3,000 stores, the completion of construction of a new Dollar Tree banner distribution center in Warrensburg, Missouri, as well as the start of construction on Dollar Tree DC 15, and additional automation projects, and the completion of our Chesapeake store support center expansion.

Depreciation and amortization totaled $156.6 million for the fourth quarter. Depreciation and amortization expense was $155.5 million in the fourth quarter last year. For fiscal 2018, we expect consolidated depreciation and amortization to range from $610 million to $620 million. This includes $59 million for fiscal 2018 for the amortization of favorable lease rights for the purchase accounting valuation of Family Dollar leases basis compared to $69 million in the prior year.

The company benefited in the fourth quarter and fiscal 2017 with respect to the Tax Cuts and Jobs Act. We expect to continue to benefit going forward an estimate of benefit to be approximately $250 million for fiscal 2018. We plan to invest approximately $100 million as follows: invest in our stores with more hours, in-stores, including training for associates. Invest in our people with increased average hourly rates. Add our Family Dollar eligible associates to the Defined Contribution Plan starting in fiscal 2017, and increase contributions in fiscal 2018. Establish paid maternity leave for eligible associates. The $100 million investment in the business is included in our company outlook.

Before I speak to our assumptions included in our 2018 outlook, I wanted to outline adjusted earnings results for fiscal 2017. As shown in the reconciliation of non-GAAP financial measures in the earnings release, adjusted EPS for the year was $4.86. Additionally, in 2017, we benefited from the following. $0.21 per share for the 53rd week, a $0.04 benefit per share for a Q2 tax item, and $0.02 per share in Q4 related to the Windsor, Connecticut DC forgivable promissory note. This result in an adjusted EPS for fiscal 2017 of $4.59.

Our initial outlook for fiscal 2018 includes the following assumptions. Calendar considerations for the year include the following: 2018 is a 52-week year, and again the 53rd week in Q4 of 2017 included added $406.6 million to sales. Easter will be 2 weeks earlier this year, representing an estimated $13 million headwind to Q1 sales. And Halloween shifts from Q4 into Q3.

We expect continued pressure on store payroll based on state's increasing minimum wages and general average hourly rate increases. We have budgeted higher freight costs and diesel costs than a year-ago. Our outlook currently includes a headwind of approximately $68 million or $0.22 in earnings per share related to these costs. We will continue to work with our transportation partners to mitigate these increases as we go forward.

Net interest expense will be approximately $70 million in Q1 and $60 million for Q2 through Q4. Included in Q1 interest expense is approximately $6.1 million or $0.02 per diluted share for the acceleration of non-cash deferred financing costs related to the redemption of the 2020 Notes, which I spoke to earlier.

Our guidance does not include any share repurchases. We cannot predict future currency fluctuations, we've not adjusted our guidance for changes in currency rates. Again, our 2018 guidance does included the investment of $100 million into our business of the projected $250 million tax benefit. Our guidance assumes a tax rate of 23.1% for the first quarter and 22.9% for fiscal 2018.

Weighted average diluted share counts are assumed to be 238.5 million shares for Q1 and 238.9 million shares for the full-year. For the first quarter, we're forecasting total sales to range from $5.53 billion to $5.63 billion and diluted earnings per share in the range of $1.18 to $1.25. These estimates are based on a low single-digit same-store sales increase and year-over-year square footage growth of 3.3%.

For fiscal 2018, a 52-week year, we're forecasting total sales to range between $22.7 billion and $23.12 billion and diluted earnings per share in the range of $5.25 to $5.60. These estimates are based on a low single-digit same-store sales increase and 3.7% square footage growth.

With that, I will turn the call back over to Gary.

[Gary Philbin, Enterprise President and CEO]

Thank you, Kevin. Again, I'm pleased with our performance for the fourth quarter and throughout 2017. I’m extremely proud of our combined Family Dollar and Dollar Tree teams. We continue to make meaningful progress to grow and improve our business. We are well-positioned in the most attractive sector of retail to deliver continued growth and increased value for our long-term shareholders.

Our company is now a diversified combination of 6,600 single price point Dollar Trees and 8,100 neighborhood Family Dollar stores, each with its unique ability to effectively serve more customers through all types of markets. This combination of two great brands provides great flexibility in managing our growth.

I'd like to describe our investment in the business that Kevin detailed by line item in his comments. Our view is take a portion of the tax savings to invest in the business, while the majority of the savings will drop to our bottom-line earnings and positively drive earnings per share. This is a unique opportunity to invest where our customers will see the greatest impact when they shop at Family Dollar or Dollar Tree store.

We are going to invest in our people. I believe hiring more associates at store level, driving more hours into our stores will create a better shopping experience. As you’ve heard us describe before, a direct link to our store managers who can best drive the business for their stores and be rewarded with higher bonuses. We will approach this with the same discipline to invest in the right seasons and weeks and months like we will do any other project and we will measure as we put the hours into specific stores.

Also, training for associates at store level, primarily for our store managers, they have such great influence on their teams and our success. Our best store managers almost without exception are run by our veterans store teams led by great store managers. Investing in rates of pay. The current levels of unemployment in some geographies have put pressure on wages. Both at our distribution centers and stores, we believe we can find the right levels to keep and attract the best people to drive our success.

The productivity that our experienced associates drive into our business delivers the bottom line results that we've been proud to report. Investing in associate benefits, smaller in scale, but just as important call on to establishing a maternity leave program with details to be soon announced to our full-time Associates, and including our Family Dollar team members in our profit-sharing program.

Investing in our families that provides service to the families and their neighborhoods will make Dollar Tree, Family Dollar the employer of choice in the communities we serve. Our profit-sharing program contributes to our full-time associates and directly links our company goals to drive shareholder value to the teams that drive customer engagement. We will also be investing in certain Family Dollar store stores that need to be brought up to brand standard.

We're investing in these specific areas of our business because we believe they will drive our business and create a better opportunity for our stores to perform across the spectrum of customer engagement stores that reflect our brand standard. I'm counting on our teams to be able to drive a better shopping experience and more sales.

Finally, I recently joined our global sourcing teams on their important post holiday overseas buying trip is with both Dollar Tree and Family Dollar merchants, a successful trip and we met our planned margin goals. Our teams continue to effectively develop our direct to factory partnerships, shop the market and procure great values and improve our supply chain and quality control standards.

Dollar Tree is well-recognized and well-respected overseas as a successful growth retailer. Our company has developed experience and expertise in sourcing and we're leveraging these assets across all banners. The retail environment ever changing provides both banners opportunities to take advantage of our customers wants and needs.

Our management team has demonstrated over the years the ability to be nimble and deliver results when challenged by the external environment. Our initiatives at both banners have helped to deliver on sales, margins, expense control and ultimately customer satisfaction. We are proud of the progress we have made and enthusiastic about the opportunities ahead of us.

Operator, we’re now ready for questions.

[Operator]

Thank you, sir. [Operator Instructions] We will go first to Robby Ohmes of Bank of America Merrill Lynch.

[Robert Ohmes, Bank of America Merrill Lynch]

Good morning. Thanks for taking my question. Gary, I actually was hoping you could talk about what you're seeing in the momentum of your customer? Has there been any slow down or maybe work into that, maybe momentum with your customer thinking about gas prices being up a bit versus last year. May be whether you are -- aren't seeing any kind of trade up in some of your categories? And then, maybe even some color on in the markets where labor is tighter and wages are going up, do you see differences in your same-store sales versus markets where that isn't happening? Thanks.

[Gary Philbin, Enterprise President and CEO]

Thanks, Robby. If I were to take a look at Q4, you saw some of the categories. On the Dollar Tree side, our seasons and punctuated really by the Christmas season, the biggest holiday we have, was just terrific. Credit to the assortment, the excitement in stores, it showed up with great sell-through and we could not have been more pleased with the seasons. And we sort of have always laid down that the hurdle we want to jump every year is, every season we come to, we want to jump over and certainly the team did that in the fourth quarter. And for Dollar Tree, its continued into really the Valentines, little bit of a smaller holiday, but just a great impact there. And so I would say our -- the mix that you saw in the fourth quarter, consumables and discretionary, sort of at a race for each other that we're comping great, that mix has continued into the beginning of this year. So, we’re going to overcome and work our tail off on early Easter with winter storm still hitting both coasts, not thrilled with what March does to an Easter holiday, but I think on the Dollar Tree business we see the same kind of momentum. At Family Dollar, we did a lot of redos this year. We -- if you went to a Family Dollar store, you saw more brands around toys and some of our reinvention of what our customers saw there and the customer responded favorably. So some of that was a trade up, so we continue to refine our business around the holiday. The consumables is driving the business at Family Dollar. As always, it's the magic of bringing in the seasons, the Wow!, whatever we can do there. Now, if we go into the beginning of this year, we're driven a lot by the tax credits that our customers get. They backed up another few days this year and so we’re really at the beginning of that. So we'll see how our customer respond through March with a few more dollars in her pocket as we go through March. As far as wage pressure, it’s hard for us to see a difference in comps. I would say, it's more driven by -- if we deliver great value in our stores, no matter what neighborhood, we tend to get a lift in that community and that stores. So our investment in our people that I outlined, really I think speaks to our opportunity to continue to drive our business by having folks well-trained, staffed in-store, drive the shopping experience. And for both banners I think when we put those links together, we end up in a good place.

[Robert Ohmes, Bank of America Merrill Lynch]

And just on gas prices? Have you seen any changes in momentum related to the higher pump prices year-over-year?

[Gary Philbin, Enterprise President and CEO]

Well, it certainly puts pressure on lower end customer. It's gas prices, rents are up in most markets. You always -- you never take all when you know that your customers are under pressure on those things, but I can't tell you that its affecting us in terms of basket because we’ve seen that tend to grow on both banners. Family Dollar traffic, a little flatter than Dollar Tree. So we’re still split between an urban customer that probably is more walk-in and more mass transit versus rural that does have to get into a car. So I would say it's hard to define what we're seeing on gas prices affect the customer right now. I do know this, it's a few more bucks out of their pocket. It's a few more bucks out of their pocket on rent. So we're very focused on the values up and down the store shelves.

[Robert Ohmes, Bank of America Merrill Lynch]

Great. Thanks very much.

[Operator]

We will go next to John Heinbockel of Guggenheim Securities.

[John Heinbockel, Guggenheim Securities]

So two related questions. Number one, if you think about the reinvestment of the tax benefit is clearly the right thing to do. Can you get your arms around an ROI on the $100 million, particularly, over a lot of retailers, adding hours, adding -- raising wage rates, or it's just something that you know it's the right thing to do directionally, but really can't -- you can't tell what the benefit is relative to your competition? And then, secondly, if you think about those investments and what’s happening with freight, is your view on the trajectory of the Family Dollar margin turnaround changed? Does it get kind of pushed out a little bit because of those pressures?

[Gary Philbin, Enterprise President and CEO]

Thanks, John. I think on the first piece, I think you're spot on. I mean, you heard all that CapEx initiatives and we’re very disciplined on every dollar we put out on the CapEx side either at stores or frozen food or adult beverage, all those are measured with ROIs. Now we’re going to invest in people with $100 million, and we’re going to go into with the same sort of business savvy that says where do we get a $1.50 back if we invest a $1. It doesn't always work quite that way. I think our investment in our people ought to show up with better run stores, stores that are better in stock, stores that around seasons, and around first of the month, have what our customer needs. So, some of this is a down stroke in my mind to help us get our stores in our trajectory. And while everybody is doing some of this, we are in the value sector that I think we have the best chance to have our customer respond more quickly to it. So we’re going to measure it. It's going to be targeted by just as I said. It’s going to be sometimes down to the weeks of the month, around key holidays, we’re going to be targeted to specific stores that we think we can drive additional business. And so, we're going to attract it. It's just maybe not as clean as we track our capital projects as we go through the year. The freight side is a real thing right now, and it's a component really of some of the driver shortages that we will see how long that lasts and where we are on diesel fuel. Diesel fuel is sort of back to the future of 2015. We are almost starting to the same price per gallon. It leveled out, we'll see what happens this year. I'd like to think maybe there's some relief in back half of the year. The driver piece is little more complicated for all of our third-party partners. They've got to find enough folks to service. We certainly have commitments to follow them. I think we're a great customer to have. We can put a lot of folks to work in that arena and we’re serving known quantity and we’re growing. And I think the growth that we can give folks as they pitch their wagon to our engine is at least a place for us to build a future that allows us to leverage that. But near-term we’re going to have to overcome this rate piece. So we’re looking and asking our logistics team inside, part of its transportation, how do we make DCs more productive. I mean when we hit these bumps in the road from an external force on the outside, it's all hands on deck. And so we've given you our best forecast and what we know baked in, and now we’re going to work our tails off to overcome it.

[John Heinbockel, Guggenheim Securities]

Okay. Thank you.

[Operator]

[Operator Instructions] We will go next to Matthew Boss of JPMorgan.

[Matthew Boss, JPMorgan]

Thanks. So at Family Dollar, gross profit dollars up 16%, best performance in really recent history. I guess, how should we think about the progression of comps versus gross margin going forward is what we've seen so far low single-digit comps and outsized gross margin in the last couple of quarters. Is that in line with your strategy to date and I guess more so what I'm asking is how should we think about the sales per square foot opportunity from here at Family Dollar?

[Gary Philbin, Enterprise President and CEO]

Thank you, Matt. No, listen, I will start off by saying we can always do better. And a one comp for the quarter at Family Dollar, quite frankly we went in with plans that we would do more. But it sort of backed up and say what are the things are going to drive comp for the Family Dollar business. It comes down to the merchandise. So everything you’ve heard us talk about on the marketing and merchandising plans is getting back to the EDLP. Winning back customers that have confidence in us on pricing, private brands, more import, you’ve heard us talk about those things, it's all under our Smart Ways to Save. The other piece that’s a slower burn is we’ve got to change some of the stores that the customers see. So it's really a two-pronged attack. One on pieces that get new stores out there, so this year is another 300 new stores that will be next generation stores. The renovations we are pleased with last year, we accelerated. We will do more this year. And I think over time that's what’s going to change both the productivity on sales per square foot and continue to help the margin mix and enhancement as we get the stores that start to sell a better mix of product. So it's a combination of what we can do tactically on merchandise marketing, touching our customers. Strategically, it's also about how we have to get the right store format across -- network across 8,200 stores and many of them older than some of you on the call. And so it's going be a time over that we get to change those and change neighborhood by neighborhood on our customer. I think what you see on the margin piece, we need comps. Sales solve all issues, and that's the focus of the Family Dollar merchandising team. Keep changing and work on the mix, drive costs, create value and over time get the excitement in the merchandising, so that the need starts to change as well. That's still the vision we start off with. We haven't changed our thinking at all. It is -- maybe sometime slower than we would like, I know that. But it's the combination of what we see on new store renovations, new stores, and maybe the last exclamation on sales per square foot. It's also how many stores we put into densely populated urban areas, because they react distinctly different than a rural, small town Family Dollar. And so, we are working on both sides of that coin to say how do we drive productivity in both of them, in the mix of new stores that come out on any given year.

[Matthew Boss, JPMorgan]

Great. And then just a follow-up on the expense front. So underlying the $100 million tax reinvestment, I guess, what -- what's the fixed cost hurdle that we should think about to leverage SG&A at both Dollar Tree and Family Dollar, both this year and going forward? Meaning, has anything changed on model flow-through or the way that you think about investments other than using some of the tax savings to reinvent this year?

[Gary Philbin, Enterprise President and CEO]

Yes. I’d tell you, Matt, I don’t think anything has changed from a flow-through perspective, if anything I think over time we would continue to see flow-through improve on the Family Dollar side. Obviously, this quarter we saw gross profit improved significantly. Our outlook basically takes into consideration and it's continuing to improve to some level next year. So I think the flow-through is fine. So, again, as we think about our fixed costs and what it takes to leverage those, I think we're still in that probably that 2% to 3% range roughly. And again, it varies quarter-to-quarter, and so I always want to think about it more on an overall basis. So I would tell you in that 2% to 3% range on normal basis without a -- the large investment that we’re making this year.

[Kevin Wampler, CFO]

And I would just add, maybe what's changed is the investment that we're talking about is obviously going to affect op income with the flow-through coming down to EPS. But I really think the down stroke on improving the shopping experience is going to be the magic sauce for us as we continue to improve both banners and what the shopping experience can be for both.

[Matthew Boss, JPMorgan]

That’s great. Best of luck.

[Operator]

We will go next to Karen Short of Barclays.

[Karen Short, Barclays]

Hi. Thanks. I just wanted to clarify something in terms of backing into your EBIT margin guidance. So if I look at fiscal '17, excluding the extra week, I get kind of an 8.8% EBIT. And then, if I look at your guidance range for fiscal '18, excluding the $100 million investment, I kind of get 8.9% to 9.3% of margin range. Is that kind of ballpark?

[Gary Philbin, Enterprise President and CEO]

Yes, you’re directionally correct on the 2017 year, excluding the 53rd week. We'd tell you that’s probably right around that 8.85% adjusted. And then excluding the $100 million basically, yes, we would be showing improved operating margin. So, that's part of the investment we've made. So that’s the pressure point that as well as the frieght, but yes, operating margin without the $100 million would be increased year-over-year.

[Karen Short, Barclays]

Right. And it’s about 40 basis points with the $100 million. So, okay.

[Gary Philbin, Enterprise President and CEO]

Yes.

[Karen Short, Barclays]

And then the second question I just want to clarify, Garry, you made a comment that out of the 250, you are investing $100 million and the rest is going to flow-through. But I just wanted to clarify in terms of your CapEx, when I look at your CapEx dollars as a percent of sales in '17 versus your CapEx dollars as a percent of sales in '18, it does look like it's increasing by about 100 basis point. So it seems to me that a lot of that -- into that additional $150 million is actually going to CapEx? Is that not -- is that the way to look at it?

[Gary Philbin, Enterprise President and CEO]

No, Karen, I’d tell you that whether there was Tax Reform or not, our CapEx number did not change basically. We did not make any changes to our decisions of how we were investing in our CapEx related to Tax Reform. These projects were already in -- on the planning board and in the -- in flight stages, basically prior to Tax Reform. So it did not have an impact on our decisions related to that.

[Karen Short, Barclays]

Okay. And then just last clarification question, of the $100 million you did say some of those was retroactive to '1, right, for the Family Dollar Defined Contribution Plan. Do you -- could you just give us what that dollar amount is?

[Gary Philbin, Enterprise President and CEO]

Yes, that’s approximately $5 million, Karen.

[Karen Short, Barclays]

That was [indiscernible]. Okay. Thank you very much.

[Operator]

We will go next to Scott Ciccarelli of RBC Capital Markets.

[Scot Ciccarelli, RBC Capital Markets]

Good morning, guys. Obviously lots of moving pieces with the diesel you talked about and incremental investments. But what’s the right way for the investment community to think about the Family Dollar upgrade margin for 2018? Obviously, you are trying to balance these incremental investments whereas what should still be synergy benefit? Can you provide any more color on that?

[Gary Philbin, Enterprise President and CEO]

Yes. Thanks, Scot. As we think about the operating margin for our Family Dollar business, as we’ve said, we do expect to see continued improvement in our overall product margin. We've done a good job, the last half of this year controlling our markdowns in a much better way as we go forward, we look to continue that. So I think that's an important aspect of it. That will help, hopefully, more than offset, we would actually look for our gross profit to increase in our Family Dollar banners in 2018. And then, obviously the SG&A is under a little bit of pressure from the fact of the reinvestment. And if you look at the overall reinvestment of about $100 million, it's slanted about 60% Family Dollar, about 40% Dollar Tree. So we would have to take that into consideration. So I think on an overall basis, we would look at operating margin to the probably flat to up a little bit in our Family Dollar business.

[Scot Ciccarelli, RBC Capital Markets]

And, Kevin, related to that, I mean, you guys have obviously talked about kind of synergies and that the spending against it. Any change in the trends of either of those, and are we still getting towards the end of the investment piece of that?

[Kevin Wampler, CFO]

Yes, as we spoke to synergies, again, the expectation is the achievement of $300 million run rate by the end of three years which should be July of 2018. And again, we called out the reinvestment, which was roughly $300 million and we’ve stated to spend more CapEx than OpEx. And -- but, yes, we are on track. The -- no major changes in the cost side of that. It's pretty much winding down. We did announce additional up to 50 re-banners again this year from Family Dollar, Dollar Tree, so it will be a little bit of CapEx there that will continue to flow-through, but it's down to fairly minimal amount.

[Scot Ciccarelli, RBC Capital Markets]

Got it. All right. Thanks, guys.

[Operator]

[Operator Instructions] We will go next to Dan Binder of Jefferies.

[Dan Binder, Jefferies LLC]

Good morning. It’s Dan Binder. So my question was also around Family Dollar. The division has benefited tremendously on the sourcing side from the combination of Dollar Tree and Global Sourcing etcetera, which has led to a fair amount of gross margin expansion. However, the comps or sales, as you know, it's probably been a little bit lighter than you expected. I’m just curious as you think about that equation going forward, do you feel like there's an opportunity to take some of the gross margin be a bit more aggressive on the price side to help -- get the comp store sales tracking to a higher rate?

[Gary Philbin, Enterprise President and CEO]

Hey, Dan. This is Gary. Well, I think you’re right. I mean, with the efforts we’ve made on the synergy side and like items, really both merchandising teams did a great job getting us out of the blocks quickly on that piece. You referenced the import piece, which we’ve had a couple buying cycles down, but I still view, there's an opportunity there to find the right suppliers, more factory direct, they help us. So it's sort of a two-pronged effect. One, you get better costs and secondly, you can find some really exciting product, which is part of the merchandising energy we want to keep working on for both banners and get going on the Family Dollar side. Those are the types of things that I think will help drive comps. Our price checks, we’re more competitive than we were when we started this journey and not going -- we’re going to -- I can't read the future, we are not going to work in a vacuum. I think as we see the environment right now, certainly it's not the same noise that we heard at the beginning of the year, as we saw lots of activity, mainly on the grocery side. And I think for our side, the values that we want to present to our customer when she buys most often in a Family Dollar are the items that we want to be right on both on the shelf and then on promotional. So, it's partially when do we invest in that, on the add to give it a customer savings above and beyond with a price drop, part of its what's on the shelf. And part of it is also what she gets on her app now, because with 5 million folks signed up, it's that customer information, and I think over the long run gives us another arrow in our quiver on giving our customers exactly what they need on the purchase cycles they’re on. So we’re going to go into this year, we have a great marketing plan. We have our thoughts around how we want to reflect pricing both every day on shelf and what gets put into the cycles with both our partners on the vendor side, along with what we want to drive on private brands and imports. So it's a long way of saying we're going to drive our business really by segment of the market. The way that we think it's appropriate and we got more than one way of doing that as we go into '18.

[Dan Binder, Jefferies LLC]

Then also could you just clarify what the $7.5 million in other income was?

[Kevin Wampler, CFO]

Yes, again as we noted in our comments, we had a forgivable promissory note related to the State of Connecticut that once certain things were met, it became forgivable. So that has been on our books as a debt instrument basically and it was forgiven, so it comes through other income basically, non-operating.

[Dan Binder, Jefferies LLC]

Okay. Yes, great. Thanks.

[Operator]

We will take our final question from Chuck Grom of Gordon Haskett.

[Chuck Grom, Gordon Haskett Research Advisors]

Hey, good morning, guys. Just trying to connect the dots here on your guidance. So if I include the $100 million of investments in the $68 million in freight and diesel, it looks like operating margins are going to be down 40 basis points. So, I guess, my question is that Family Dollars expected to be flat year-over-year. How do we back into that down 40 with the total company? And then, Kevin, if you also could just address how you see gross margins playing out in 2018 relative to SG&A? It sounds like groceries are going to be relatively stable, but just wanted to see if you could provide some color on that?

[Kevin Wampler, CFO]

Yes, I think looking at the operating margin overall for the year, I think at the midpoint you may be down 40 basis points at the upper end, I don’t -- you’re down something less than that. So I think you’ve to think that -- think about it from that perspective. At the midpoint, yes, you would probably see pressure on both banners, operating margin at the upper end. You would see a little less on the Family Dollar side. That’s the way we’re thinking about it right now as we go forward. So, again, and it's a lot of moving pieces to your point as it relates to the investment we've laid it out and obviously we will work to how we execute to that at the end of the day. Second part of your question, Chuck, was …

[Chuck Grom, Gordon Haskett Research Advisors]

Just the composition of gross margins and SG&A in 2018.

[Kevin Wampler, CFO]

Yes. I think as we look at a gross margin, obviously, we look at product margin itself to be positive as we go into 2018 and obviously the pressure point is the freight. We look at markdowns to be an area again where we can continue to make some inroads and how we operate there, and again that's more Family Dollar dominated than it is Dollar Tree as you might imagine. So that’s a piece of it. I think otherwise we will also obviously have distribution and occupancy costs and you heard Gary say this, as we look at the moving pieces of supply chain, what we know there's pressure on the transportation side, we know we need to get more productivity through our buildings and so that will be one of the places we will be looking to improve for the year as well. But as we look at our gross profit overall there, we’re looking at the midpoint of the guidance there will be some pressure on that of probably 20, 30 bps basically. On the SG&A side, I think it's kind of obviously come down to again how it all kind of all looks at the end of the day from the standpoint of how we’re able to drive sales and leverage it, and again, with the investment there is some pressure there. So, I think at the end of the day we will see a little bit more pressure on SG&A. I would hope that we can drive some sales and leverage them a little bit better from that. I mean, that is part of to Gary's point, speaking to the investment into the company as one the things we’re looking for to drive sales to help leverage the fixed costs as we go forward.

[Gary Philbin, Enterprise President and CEO]

Chuck, let me just give my color, maybe 40,000 foot level, but I think our merchants on both sides, we really see a sight line to exciting product both on imports and I think continue to drive value with our domestic partners that how to shop on our shelves, on both banners. The pressure on the freight side, like I start off with, we’re going to work very hard to overcome this every way we know how to overcome what seems to be and hopefully something that's a -- this year issue. And we'll see, but at least it's upon us now and we’re going to work hard on that. On the SG&A side, obviously, we are investing on the labor side and we’re going to see the natural pressure, but we're investing in it to maybe get ahead of it. All I know for sure is that when I got good store managers and folks in field managers there, in stores driving the excitement, we do better and that's really the downstroke we are making to get ahead of us. And I'm betting on our store teams rise to the occasion and really drive the results that can help us overcome whatever is out there on the SG&A side, but part of that’s just starting the right mix of product to help us on the freight side too. So that's the plan as we go into '18.

[Chuck Grom, Gordon Haskett Research Advisors]

Okay. That’s helpful. Just my follow-up would be, Gary, just to the first question on the call, it sounded like you were striking a little bit more of a cautions tone on the consumer and potentially your comp trends. I guess, is it right to interpret that way? Are you seeing anything over the past few weeks that has you more concern today than maybe back in November when you provided 3Q?

[Gary Philbin, Enterprise President and CEO]

No, I don’t think I’ve -- I’m always concerned about our customer and how she is shopping. I think my reference point was on the tax credit refunds that are happening, they were pushed back about another week from last year. And so, it's a 13 holiday we have at Family Dollar on top of the other 12 first of the month. So we’re at the beginning of that holiday really and that was my reference point in talking about the Family Dollar customer. On the Dollar Tree side, man she's loving everything, we are doing on the holidays right now. Kudos to our team, but the energy in the Dollar Tree stores really feels good, showing up on our seasonal holiday sales.

[Chuck Grom, Gordon Haskett Research Advisors]

Okay. Thank you very much.

[Operator]

That is all the time we have for questions. At this time, I’d like to turn the call back over to Randy Guiler for any additional or closing comments.

[Randy Guiler, VP of IR]

Thank you for joining us on today's call, and especially if you're interested in Dollar Tree, our next quarterly earnings conference call to discuss Q1 results is scheduled for Thursday, May 31, 2018. Thank you.

[Operator]

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