Dollar Tree Inc

NASDAQ:DLTR

Earnings Call Transcript 2018-Q4

[Operator]

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

[Randy Guiler, VP, IR]

Thank you, Britney. Good morning and welcome to our conference call to discuss Dollar Tree's performance for the fourth fiscal and the fiscal year 2018. Participating on today's call will be our President and CEO, Gary Philbin; and our CFO, Kevin Wampler.

Before we begin, I would like to remind everyone that various remarks that we will make about future expectations, plans and prospects for the company, constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors included in our most recent press release, most recent 8-K, 10-Q and Annual Report, which are on file with the SEC. We have no obligation to update our forward-looking statements, and you should not expect us to do so.

As a reminder, the fourth quarter of fiscal 2017 was comprised of 14 weeks as part of our 53 week fiscal year. The extra week in 2017 contributed $406.6 million to sales and $0.21 to diluted EPS. In the fourth quarter of 2018, the company incurred several discreet charges, including a 2.73 billion non-cash charge for goodwill impairment, a $40 million inventory mark-down reserve related to the Family Dollar segment, a $13 million non-cash impairment of certain store assets, and a $1.5 million acceleration in non-cash deferred financing charges associated with debt prepayment.

The fourth quarter of fiscal 2017 includes the following discrete items; a $35 million recovery related to the Dollar Express settlement, a $12.6 million charge for an increase in the workers’ comp reserve, and a $9.8 million acceleration in non-cash deferred financing costs. These items are detailed in the reconciliation of non-GAAP financial measures in today’s earnings release. Unless otherwise noted, our margin, net income, and earnings comparisons presented today exclude the impact of these discrete items for the fourth quarter and fiscal year.

At the end of the prepared remarks, we will open the call to your questions. [Operator Instructions] Now we’ll turn the call over to Gary Philbin, Dollar Tree’s President and Chief Executive Officer.

[Gary Philbin, President and CEO]

Thank you Randy and good morning everyone. Sales for the fourth quarter were strong for both banners. Our results demonstrate the increasing strength of the Dollar Tree brand and accelerated progress on the Family Dollar turnaround, as Family Dollar delivered its strongest quarterly same-store sales growth of the year. Our merchants at both banners have delivered a 2019 plan that we believe overcomes the effect of most tariffs at the 25% level and provides opportunity in the back half of the year if tariffs are not increased.

In Q3, we had announced plans to renovate at least 1,000 Family Dollar stores in 2019. These renovated stores will include new price-impact sections including $1 Dollar Tree merchandise assortments. Approximately 200 Family Dollar stores will be re-bannered to Dollar Tree. We accelerated our Family Dollar closings in Q4, closing 84 stores, as we are aggressively optimizing our store fleet to gain traction towards our inflection points. We plan to close as many as 390 Family Dollar stores this year. Excluding the discrete charges, the combined company performed well for the quarter.

Our results for the fourth quarter included sales that were 6.21 billion at the top end of our guidance range, excluding the 14th week from the prior years’ quarter. Sales increased 4.2%. Consolidated same-store sales increased 2.4%, up from the 1% in Q3. And by segment, the Dollar Tree segment delivered a positive 3.2 comp and Family Dollar same store sales increased 1.4. This was the strongest quarterly comp in 2018 for Family Dollar and on a two year stack basis represented an acceleration of 130 basis points from Q3.

On a GAAP basis, diluted loss per share was $9.66. On an adjusted basis, excluding the discrete items Randy outlined for Q4, diluted EPS was $1.93 within the high end of our guidance range. This was an increase over the prior years’ adjusted $1.89 per share in the 14-week period. Excluding the $0.21 per share from the extra week and last year’s Q4, the adjusted EPS increase was 14.9%.

I consider the Dollar Tree brand to be the most unique, differentiated, and defensible business model of the US value retail sector, evidenced by achieving our 44th consecutive quarter that’s every quarter since 2007 of positive comps without moving our price point. Customers continue to choose Dollar Tree for the values they are able to get for only $1 for every item, leading our sector in operating margin at 12.8% for fiscal 2018, and delivering extremely consistent gross margin performance.

Through all types of environments and cost scenarios nine out of the past 10 years including 2018, Dollar Tree’s annual gross margin has been in our sweet spot between 35% and 36%. Values, assortments, categories, product introductions, product specs have all improved , but mostly importantly our customer loyalty to the Dollar Tree brand continues to grow. Our merchandizing team, which recently returned from another successful overseas buying trip is second to none in sourcing high quality, great value products while managing and protecting product margins.

You’ve heard us say it before, we are in control of our margins even with a fixed price point. Since the Family Dollar acquisition, we have taken the necessary actions to stabilize the business, capture synergies in both brands, rebuild the leadership team, introduce and develop assured services infrastructure, integrate system, create smart ways for our customers to save, improve on store standards, invest in labor and price, and importantly to repay more than $4 billion worth of debt earning our investment grade rating.

We are now at the stage to be able to invest in and reposition the Family Dollar brand for future success through an acceleration of renovations, re-banners, and store closings. As demonstrated by our improved sales performance, our strategy to optimize the Family Dollar real estate portfolio is delivering results. We’re seeing meaningful improvement in operational performance across the foot print of renovated Family Dollar stores and those that we have re-bannered to Dollar Tree. Our fourth quarter comp performance of positive 1.4 was the strongest of the year. We are excited with the results of our renovation program, both with traffic and the diversity of locations. And as announced at the end of Q3, we are accelerating this initiative in 2019.

As new and renovated stores become more significant part of the store base, we expect these stores to contribute more to our topline comps and store sales productivity. Our renovations over the past two quarters continue to outperform earlier versions and we are delivering average comp lifts exceeding 10%. We accelerated store closing of underperforming Family Dollar stores with 84 in the fourth quarter. For fiscal 2018, we renovated 522 Family Dollar stores, re-bannered 52 stores in to the Dollar Tree brand, and closed 122 underperforming Family Dollar stores.

Given the results we’re seeing from our store optimization initiative, we are confident that it will allow to drive substantial improvement in the quality of performance of the Family Dollar portfolio and create long term value. In fiscal 2019 at Family Dollar, we plan to complete at least 1,000 store renovations and 200 re-banners. We are further accelerating store closings and expect to close as many as 390 under-performing stores, and because of age, layout, location and favorable lease terms or other factors we’re now expected to provide an adequate return on investment for the cost of renovation. The final number of actual stores to closures will be affected by ongoing lease negotiations.

Sales highlights for the fourth quarter; Dollar Tree saw balance increases of both traffic and ticket. At Family Dollar, ticket was up and traffic was down for the quarter. Importantly, Family Dollar’s traffic comp improved 120 basis points from Q3. Geographically, all regions for both banners comp positively. Our cadence of comps through the quarter, November represents the softest comp month across both segments; December was the best monthly comp for Dollar Tree as the merchandising team delivered on seasonal assortment and impact. While January was the strongest month at Family Dollar benefiting from a strong start to the month and early release of (inaudible).

Dollar Tree continues to deliver solid relatively balanced positive comps in both consumable and discretionary side to the business. The consumables business drove traffic and sales at Family Dollar with comps exceeding 2.5%. Discretionary sales come negatively of Family Dollar improved more than a 100 basis points from Q3.

At Dollar Tree Canada, the team delivered mid-single digit positive comps for the quarter and for the year, with increases in both traffic and ticket. Traffic was a bit stronger in Q4 than it was in Q3. Consumables comp outperformed discretionary. Top performing categories included fruit, floral, beverages and Christmas seasonal and Canada team achieved its operating income plan for both the quarter and the year.

For Dollar Tree Direct, our loyalty club membership now surpasses 1 million members. We’ve produced or mailed 700,000 holiday catalogs to our existing and prospective customers. Dollartree Direct is much more than a selling website. It’s communicating with and enhancing the relationship with our most loyal customers. And we continue the momentum in our Family Dollar app and smart coupon program, that’s more than 8.8 million customers have not opted in to the program. Smart coupon continue to provide our shoppers with the value that builds loyalty and provides us with greater customer insight allowing it to merchandise even more effectively.

For real estate in the fourth quarter, we opened a total of 143 new stores, 83 Dollar Tree, 60 Family Dollar. We relocated or expanded 14 stores, 10 Dollar Tree, 4 Family Dollar. We renovated 34 Family Dollar stores as part of the renovation initiative and we’ve re-bannered four more Family Dollar stores to Dollar Tree for a total of over 196 projects during the quarter. We completed 522 Family Dollar renovations in fiscal 2018; we’ve also added freezers and coolers in to 95 Dollar Tree stores during the fourth quarter, bringing our total of Dollar Tree stores with freezers and coolers to 5664. And during the quarter we closed 94 stores and 10 Dollar Tree and the 84 Family Dollar stores. We ended the year with 15,237 stores, 7,001 being Dollar Tree, 8,236 Family Dollar.

Before I turn the call over to Kevin, I’d like to provide you an update on tariffs as they mentioned on our call last quarter. Our merchandizing teams for both players have done an extraordinary job in tariff mitigation. While the increase in section 301 tariffs from 10% to 25% as of March 1 has been postponed, we will continue to monitor the situation. The outlook Kevin will share is based on tariffs going to 25% as was the expectation when we built our annual business plan and bought product to the back half of the year. If tariffs do not increase, we could see margin opportunity primarily in the back, but we’ll provide updates as the situation evolves.

Now I’ll turn the call over to Kevin to provide more detail on our Q4 and our initial outlook for 2019. Kevin.

[Kevin Wampler, CFO]

Thank you, Gary and good morning. Total sale for the fourth quarter was $6.21 billion comprised of $3.31 billion at Dollar Tree and 2.90 billion at Family Dollar. Excluding the 406.6 million in sales from the 14 week in the prior years’ quarter, sales increased to 4.2%. Enterprise same store sales increased to 2.4% on a constant currency basis or 2.3% when adjusted for the impact of Canadian currency fluctuations.

On a segment basis, same store sales for the Dollar Tree segment increased 3.2% or 3.1% when adjusted for Canadian currency and the Family Dollar comp increased to 1.4%. Overall gross profit for the quarter was $1.91 billion compared to $2.1 billion in the prior years’ 14 week quarter. As a percent of sales, gross margin decreased to 30.8% compared to 33% in the prior year.

Gross profit margin for the Dollar Tree segment was 37.1% for the fourth quarter, a 90 basis points decline compared with the prior years’ fourth quarter. The decline as a percentage of sales was primarily due to 45 basis points of higher occupancy costs, deleveraging from cycling the extra week in the prior years’ quarter. 35 basis points of merchandise cost including freight as higher freight cost were partially offset by improved mark-on and a positive effect of product makes a strong seasonal merchandize sale and 10 basis points of increased strength.

Gross profit margin for the Family Dollar segment was 23.6% during the fourth quarter, compared with 27.6% in the comparable prior year period. The year-over-year decline was primarily due to mark-downs which increased approximately 210 basis points. This increase included a 140 basis points or $40 million reserve for SKU rationalization, as well as increased promotional and seasonal mark-downs and lower mark gain allowances during the quarter.

Merchandise cost including freight increased approximately 85 basis points, driven primarily by an increase in freight expense, offset by slightly higher initial mark-up. Occupancy costs increased approximately 45 basis points, primarily due to the deleveraging effect of the additional sales from the 53rd week in fiscal 2017. Shrink increase approximately 35 basis points due to unfavorable inventory results in the current year quarter and from changes in accrual rate. And distribution cost increased 25 basis points.

Consolidated selling, general and administrative expenses as a percentage of net sales in the quarter increased 50 basis points to 21.5% from 21% in the same quarter last year. Prior year included a 35 million repayment of the Dollar Express receivable written off earlier in 2017. Excluding the repayment, SG&A as a percentage of sales was 21.5% in the prior years' quarter.

Fourth quarter SG&A expense for the Dollar Tree segment as a percentage of sales improved to 20.7% compared to 21.1% from prior year’s quarter. The improvement was primarily due to lower incentive compensation and workers compensation costs, partially offset by a 20 basis points increase in store dollar apparel expenses resulting from the planned tax reinvestment. Excluding discreet charges, SG&A expense for the Family Dollar segment as a percentage of sales was 22%, compared to 20.8% in the prior years’ quarter. Excluding the 35 million Dollar Express settlement in the prior quarter, SG&A as a percentage of sales was 22%.

Payroll expenses increased approximately 28 basis points primarily as a result of an increase store hourly and field management payroll in connection with the planned reinvestment of income tax savings partially offset by a lower incentive compensation and other performance based compensation.

Depreciation and amortization improved 20 basis points while excluding the $10.8 million store level impairment charges partially offset by the de-leveraging effect of the additional sales from our 53rd week in fiscal 2017. On a consolidated basis, adjusted operating income was $632.6 million compared with $743.2 million in the same period last year, which included one extra week and operating income largely was 10.2% compared to 11.7% in last years’ fourth quarter.

Operating income margin for the Dollar Tree segment declined 50 basis points to 16.4% compared to the prior years’ 14 week quarter. Adjusted operating income largely for the Family Dollar segment was 3% for the quarter. Now on operating expense for the quarter totaled $46.7 million, which was comprised primarily of net interest expense.

Our effective tax rate for the quarter was 5.1% compared to a benefit of 50.4% in the prior year period. The rate in 2018 is a result of the goodwill impairment charge not being tax deductible. The prior benefit was a result of the Tax Cuts & Jobs Act which totaled the benefit of approximately $583.7 million.

For the fourth quarter, net loss including discreet charges was $2.31 billion and GAAP diluted loss per share was $9.66, compared to diluted earnings per share of $4.37 in the prior year’s quarter. On an adjusted basis, diluted earnings increased 2.1% to $1.93 compared to an adjusted $1.89 in the prior years’ 14 week quarter. Excluding the $0.21 per share benefit from the extra week in 2017, adjusted earnings per share increased 14.9%.

Combined cash and cash equivalents at fiscal year-end totaled $422.1 million compared to $1.1 billion at the end of fiscal 2017. On January 18, 2019, the company repaid its $782 million term loan facility. As part of the pre-payment the company accelerated 1.5 million of deferred financing cost which were included in interest expense in the fourth quarter. Our outstanding debt as on February 2, 2019 was $4.3 billion, a decrease of $1.4 billion from the prior year end.

Inventory for the Dollar Tree segment at quarter end increased 11.4% from the same time last year, while selling square foot increased to 5.3%. Inventory for selling square foot increased 5.8%. The increase reflects the acceleration of our receipts of certain import goods to minimize the impact of increased tariffs. We believe the current inventory levels are appropriate to support the scheduled new store openings and sales initiatives for the first quarter.

Inventory for the Family Dollar segment at quarter end increase 11.7% for the same period last year increased 10.8% on a selling square foot basis. Capital expenditures were $194.4 million in the fourth quarter versus $182.8 million in the fourth quarter of last year. But for fiscal 2019, we’re planning for consolidated capital expenditures to be approximately $1 billion. Capital expenditures will be focused on 550 new stores, 350 of which will be Dollar Tree, 200 Family Dollar, along with at least 1,000 Family Dollar renovations and 200 re-banners. The addition of frozen or refrigerated capability to a total of 500 new and existing Dollar Tree stores, the expansion of frozen or refrigerated capability to 400 Family Dollar stores, and the addition of adult beverage to 1,000 stores.

IT system enhancements and projects, installation of LED lighting in approximately 3000 stores, and the completion of construction of a new Dollar Tree banner distribution center in (inaudible) County, Ohio, as well as the start of construction of a new DC 16, and additional automation projects. Both new DCs will have co-bannered capabilities. Depreciation and amortization totaled $166.7 million for the fourth quarter. Depreciation and amortization expense was $156.6 million in the fourth quarter last year.

For fiscal 2019, we expect consolidated depreciation and amortization to range from $635 million to $645 million. Our initial outlook for fiscal 2019 includes the following assumptions; our guidance is based on the expectation that Section 301 tariffs would move to 25% in March of 2019. If these tariffs do not move to 25%, we expect to see margin benefit in the second half of fiscal 2019. Calendar considerations for the year include the following; Easter will be three weeks later in 2019, which should benefit Q1 sales, and there will be six fewer selling days between Thanksgiving and Christmas, which will negatively impact Q4 sales.

Our guidance does include expenses in connection with the effects of our store-optimization program. It does not include charges for lease obligation expense for any closed stores, which would be negotiated in fiscal 2019. We expect to incur $37 million related to consolidating our store support centers, and we expect continued pressure on store payroll based on competitive markets and states increasing minimum wages. We expect year-over-year freight cost as a percentage of sales to increase in the first half of the year, and then flattened out in the second half.

Diesel is currently expected to be a benefit for the year. Net interest expense will be approximately $415 billion in Q1, and approximately $153 million for fiscal 2019. We cannot predict future currency fluctuations and we'll not adjust our guidance for changes in currency rates. Our guidance assumes a tax rate of 22.9% for the first quarter and 22.6% for fiscal 2019. Weighted average diluted share counts are assumed to be 239.1 million shares for Q1 and 239.4 million shares for the full year.

For the first quarter, we are forecasting total sales to range from $5.74 billion to $5.85 billion and diluted earnings per share to range of $1.05 to $1.15. These estimates are based on a low-single digit same-store sales increase. For fiscal 2019, we are forecasting total sales to range from $23.45 billion to $23.87 billion based on a low-single digit same-store sales increase, and approximately 1% selling square foot growth. Company anticipates GAAP net income per diluted share for the full fiscal year 2019 will range between $4.85 and $5.25, which includes costs of $95 million or $0.31 per share. Diluted earnings per share in fiscal 2019 are also burdened by approximately $0.18 due to the expected tax rate being 22.6% as compared to 19.9% excluding the goodwill impairment charge in fiscal 2018.

The $95 million in discrete costs are related to the following initiatives; 37 million of store support center consolidation costs; 30 million of incremental initiative costs based on project count and velocity’ and 28 million of store closure costs which as noted does not include any lease obligation expense we would negotiate. These discrete costs are expected to be incurred disproportionately, as approximately 75% will be incurred in the first half and 25% in the second half of fiscal 2019, as the company targets completing a majority of initiative projects by the end of august 2019.

Due to the costs associated with these initiatives year-over-year operating income is expected to be lower in the first half of fiscal 2019, but it is expected to show material improvement in the second half as these initiatives gain traction. Additionally, we believe that these initiatives will drive business and provide a platform for an accelerated improvement in earnings in fiscal 2020, when the company's earnings per share is expected to grow 14% to 18% over reported fiscal 2019 earnings per share.

I'll now turn the call back over to Gary.

[Gary Philbin, President and CEO]

Thanks Kevin. Before turning to Q&A, I'd like to highlight the continued progress we are making with Family Dollar. On the Q3 call, we shared an update on the integration process, our success in building a common foundation across the Dollar Tree and Family Dollar banners, and our development of the renovation model that is generating returns we're looking for. We have since received very positive feedback from many investors, and we are confident we are on track to reaching an inflection point as we continue to optimize the store fleet of Family Dollar throughout 2019.

In addition to synergies, it's important to recognize the profound impact of Dollar Tree and Family Dollar brands have had on each other, and the meaningful value this creates for our shareholders now and into their the future. But the benefits of the merger have not just been for the Family Dollar brand, Dollar Tree has benefited too. The stores we have re-bannered from Family Dollar are performing well, and have improved Dollar Tree's overall profitability, a trend that should continue as we re-banner more stores.

The Dollar Tree banner has also benefited from indirect procurement. We estimate we have saved more than 55 million. We've also used our scale of more than 15,000 combined (inaudible) to drive merchandise cost savings exceeding $70 million. Family Dollar, we've driven more than 145 million in estimated savings for indirect procurement, and more than 100 million in cost of sales. In particular as a result of our scale we have decreased Family Dollar's initial merchandise costs by approximately 153 basis points, since 2015. The lower merchandise costs have allowed us to partially offset higher distribution costs, shrink and higher freight and fuel costs.

Overall Family Dollar, we've taken the savings and reinvested in the business to drive traffic and loyalty by lowering prices at stores and increasing staff to improve shopper experience. Our portfolio optimization strategy is generating performance improvements across Family Dollar, and we are accelerating the program in fiscal 2019 and beyond. We have identified high performing stores, the stores that will benefit from renovation and under-performing stores some that can be better at Dollar Tree and others that because of age, layout, location, (inaudible) lease terms or other factors may not benefit from either. These are what we have grouped to potentially close.

As I noted earlier, we have developed and tested a new model for renovated Family Dollar stores, which we are calling H2. I spoke about this on our previous call, but I want to give you a little more color on why it's performing so well. Our H2 model has a better shopping adjacencies, more productive end-caps, a greater number of freezers and coolers, which allows to offer more consumables and better serve the mid-week shopping (inaudible) needs of our customers. It’s performance has also been enhanced by the introduction of Dollar Tree $1 merchandise throughout the store.

This last touch has been very successful in driving traffic to these stores, many of which are in (inaudible) locations, where a Dollar Tree would not be as successful. Our H2 stores are generating increased traffic and strong comp store sales in excess of 10% over control stores, with actual comp store sales in excess of 13%. This new design has shown strong performance in a variety of locations, especially in locations where we have been the most challenged. As we said in November, we plan to renovate more than 1000 of these stores in 2019, with an accelerated schedule in future years. We also plan to re-banner approximately 200 Family Dollar stores to Dollar Tree stores this year, opening 350 new Dollar Trees and 200 new Family Dollars.

We will be accelerating our store closings in the fourth quarter of 2018, with 384 stores that we mentioned. In 2019, we will close as many of 390, subject to ongoing lease negotiations. This higher level of store closures in Q4 and anticipated store changes in 2019, result in $40 million in incremental mark-downs during the quarter. However, in conjunction with our new store openings, our renovations, and conversions to Dollar Tree, we are confident that these actions will result in an improved portfolio of Family Dollar stores that will set the stage for stronger, long term performance.

In addition to optimizing the Family Dollar portfolio, we plan to add adult beverage in approximately 1000 stores, expand freezers and coolers in 400 stores, and continue to improve the Family Dollar merchandising strategy. Some of these improvements will not be implemented until the middle or end of 2019, but we believe we'll demonstrate the potential of Family Dollar by the end of 2019. We are keenly focused on a proposal to enhance future value-creation for our shareholders.

As our long term investors know we have never been shy of testing different options at Dollar Tree, we have explored introducing multiple price points in the past ranging from our Oops test to our larger experiment we ran with Dollar Tree deals. And as we can see, with our H2 renovations at Family Dollar, we've effectively tested the opposite introducing a broader range of Dollar’s price point items to the multi-price point format. The fact is the model works very well.

Dollar Tree, one of the most unique, differentiated, defensible models in value retail has an extremely loyal customer base, our previous testing of this concept has demonstrated that everything's at the Dollar is an incredible powerful part of our value proposition, and lets us drive industry leading margins delivering 44 consecutive quarters of positive same-store sales. To be clear, our efforts over the long term have been to protect and grow the brand, deliver the wow factor for our customers, and increase value to our shareholders, part of what is regularly taking a look at that idea and introducing multiple price points at Dollar Tree.

We are open to testing again, and the fact is, with where we are in the integration of Family Dollar, our co-banner DCs afford us the capability to do so, and so we are thoughtfully and carefully playing our test in specific locations, serviced by our co-banner DCs. Our initial efforts will be to test unique assortment within these Dollar Tree stores, understand our customer research, and develop a scalable model. As always our brand is our most valuable asset around any test we do. All I can say for now is more to come on this.

We are also benefiting from the initiative we took to upgrade our Family Dollar (inaudible) 1brand program in Q2 of 2018, we completed the roll-out program of moving away from Family gourmet and Family Dollar brands to introduce products under a range of private brands including (inaudible) candy, Chestnut Hill, Driver's Choice, Tool Bench, Nature's Measure and many others. As a result of these improvements to our private brand program, the growth in these categories has been strong driving both top line sales, improved margins and customer loyalty.

I want to give you a brief update on our integration of support functions with the primary exception of merchandise, store operations and loss prevention, all other functions and departments have been fully integrated. This includes with some minor exceptions outlined in the press release, real estate, supply chain, strategic planning, global sourcing, all IT functions, strategy and operation support, finance, human resource, inventory management and legal departments. To date, this has resulted in savings of over $50 million.

We are continuing to make great progress on the consolidation of bringing all these teams together under one roof, with a new support center in Chesapeake, Virginia. This last piece of the integration which will improve our ability to support both banners, through enhanced collaboration, communication, and team work. We expect that to be completed by July and will generate an additional $15 million in savings once complete.

Regarding our capital allocation plans, as you know we maintain a responsible approach to capital allocation to position the company for future success. Since the acquisition, we have well outperformed our synergy targets and have made significant debt pay-downs, including $782 million term loan facility in Q4, for a total of approximately 4.3 billion, since completing the acquisition, and earned investment grade ratings from both S&P Global and Moody's.

Moving forward, we believe we'll generate sufficient free cash flow to cover our investment needs. The company has an existing $1 billion Board authorization to repurchase shares, and we'll continue to evaluate share repurchases in 2019. And we will continue to assess capital allocation with share buyback opportunity ahead of us. This quarter's results along with a broader work to improve performance at Family Dollar, give us confidence that our strategy of thoughtful planning and careful execution will drive value for shareholders over the long term. We do this with the support of our highly engaged and recently refreshed Board, now five new independent directors in the last 2.5 years. We will continue executing on our plans so that all Dollar Tree shareholders realize the substantial value that is being generated by our prudent investments in the future of our company.

All of this progress would not be possible without the hard work and dedication of each and every one of our associates. While we have continued the integration and refinement of our Family Dollar banner, our supply chain teams have worked hard to overcome a year of unusual external costs and service issues, our merchants have continued to find incredible values, and our 15,000 plus store teams have focused on our customers, delivering a great Q4 sales result. Our success would not be possible without them, and we thank them for their commitment and support to our common vision to be the winner in value retail.

Operator, we're now ready to take questions

[Operator]

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

[John Heinbockel, Guggenheim Securities]

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

[Gary Philbin, President and CEO]

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

[John Heinbockel, Guggenheim Securities]

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

[Gary Philbin, President and CEO]

Well, Dollar Tree of course is performing at a high level, so we continue to see the Dollar Tree leverage being, it's always about our top line, our margins even in this year. If you take the backdrop of both tariffs and freight, we've been able to manage through this year. I think at a level that I'm proud of our team. It delivers to the bottom line, as we drive more footsteps into our stores. So, Dollar Tree is always about driving more footsteps and to drive the top line comp, and that delivers the four-wall EBIT that drives down to the enterprise.

For Family Dollar, the recovery is exactly what we’ve described, the first half and the second half trajectory, with the second half picking up steam, and as I would call out, that we will continue to plan on doing additional H2 renovations into '20 and beyond to get to the inflection point that we see, which is changing this fleet of stores one store at a time. So it's a combination of Dollar Tree firing on all cylinders like we have been, and we are going to change the trajectory of Family Dollar stores with the renovation program, and the other initiatives that we called out too, that speak to some of the assortment in adult beverage and other categories

[Operator]

Our next question comes from Karen Short with Barclays.

[Karen Short, Barclays]

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

[Kevin Wampler, CFO]

Karen, this is Kevin. As we look at it, obviously the points we've given you today are really about the top line growth. And as you heard Gary talk about the fact that we are seeing lifts in these stores of over, on average 10%, and then obviously then it really relates back to what does that drive. And it's going to drive a better operating income; it's going to drive a better EBITDA margin at the end of the day. We haven't really given any metrics around that, everything we've built in again is built into our guidance.

And again, you've got to remember, at this point in time, it's about investments especially in the first half, as we talked about the fact that the costs are front-end loaded with 75% being occurred within the first two quarters; and in particular, Q2 will be affected more than in Q1, just based upon the number of projects and the pace of things especially around if we look at other things beyond that. If we look at store support center consolidation as well as store closures, a lot of those things will be happening and be affected in the second quarter.

As we go forward though, obviously there is an expectation from an EBITDA margin to grow in the Family Dollar business, and again get back to something of a more historical nature. And I don't think we've changed in that manner, and our thought process really from day one, it’s just the new model, the new renovations, and driving that forward along with the other initiatives we've got going on.

[Karen Short, Barclays]

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

[Gary Philbin, President and CEO]

Well Karen, it's a good point. We are trying to follow the same progress everyone else does, but we've built a plan assuming 25% was going to be in for the full year, and that's in our guidance. If 25% comes down, obviously it says we're going to have some savings in the back half where we bought our product and as we went over in January of this year. I guess the way I think about it, is there upside? Yes. As always, we're going to manage in real time, because truly it's all about footsteps at both banners, what do we need to invest in the right product at Dollar Tree, what's the right retails potentially at Family Dollar.

We went into this knowing that this year was a potential of $100 million at Dollar Tree, as a potential tariff impact and 40 million at Family Dollar. We've mitigated most of that, and I'd say most because when the 25% was announced lots of items were already on the water, so some of that impact is in the first half versus what we are able to negotiate in the back half. That well, I look forward to the bottom line, where it gives us an opportunity to invest in the business as we see tariffs change from 25 to 10 or 10 to 0.

[Operator]

[Operator Instructions] our next question comes from Scot Ciccarelli with RBC Capital Markets.

[Scot Ciccarelli, RBC Capital Markets]

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

[Kevin Wampler, CFO]

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

[Scot Ciccarelli, RBC Capital Markets]

And hopefully just a housekeeping item is there any assumption built into your earnings guidance for the multi price point test at Dollar Tree?

[Gary Philbin, President and CEO]

Hey Scot, it’s Gary. Now listen, we wanted to give you a sense of how we think about our testing, and as a management team you've heard us in the past talk about some of them, others never make the light of day. But listen this is something that we are going to be very smart about. We have some insights from our past tests that we've done, but there is nothing in guidance. And listen, we'll report on it as we see it's something that we need to report on.

[Operator]

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

[Chuck Grom, Gordon Haskett]

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

[Gary Philbin, President and CEO]

We had a good Q4 of both banners Dollar Tree and Family Dollar with the comp. The confidence in the business, listen we renovated 585 stores as we've said before, only 200 and change of those were H2s. What the H2 has changed is really the footsteps into those stores, and that's what gives us confidence in the model across the demographics, locations, competitive sets, the ability. Our technology has allowed us to do now to be able to put Dollar Tree product easily into the Family Dollar stores. That's what gives me confidence, but the comp for the fourth quarter was really all but rising in to the things that we are doing every day at Family Dollar to drive the business. So it was a good Q4, and what I was pleased with was the important December timeframe, where we invested in categories, toys, like a lot of folks did.

We had a strong toy category season, the consumables which we've always talked about being the bellwether what we try to track and what our customers need most are doing well. So what's ahead of us are more H2s, and it changes the foot traffic because it's more of what our customers need across the categories. And while the previous renovated stores are doing okay, what the H2 stores delivered are higher footsteps, a modest increase in basket, but it's really about our customers coming in and gaining, shopping more of the isles, and seeing more of the categories, and more of the dollar price points along with some of what we're doing with WOW tables and queuing lines.

So it's a nice combination to drive in the customer with what she needs and what she wants, and reflects a lot of the impact that we can do over the years that we've seen with Dollar Tree on seasons, and now you have the ability to spread out that price point. For the multi-price point, here's how I'd like you all to think about it. Listen, we have an ability now to easily get into some product that our Family Dollar merchant team buys. We're over together in the same factories, when we travel to Asia, we work in the same office. That's really where the rubber hits the road in terms of identifying these WOW items.

So when I think about how we are going to test a multi-price item, what that means at Dollar Tree when we've done it before, well here's an opportunity to select items especially around high value items that we see when we're together on important trips, something different that would complement Dollar Tree. And what's the success in this? Well listen let's protect the brand, and Dollar Tree to me is so unique, it cuts through, it clarifies for our customers. I've received plenty of letters and emails from customers that tell us exactly that.

It doesn't mean we shouldn't test though, and we're going to go into this with the thought that listen why now? Because why won't we do it now? We've always been (inaudible) that test and learn, and we're open to ideas and good ideas that work, and success for this is adding to the brand and developing something that our customers still say I go to Dollar Tree because of that WOW factor. And listen the customers won't tell us exactly what it is they see, feel. We'll be all over this thing as we test and learn as we go forward

[Operator]

Our next question comes from Paul Trussell with Deutsche Bank.

[Paul Trussell, Deutsche Bank]

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

[Kevin Wampler, CFO]

Good morning Paul, as we work through the plan for our guidance together again the biggest differential year-over-year is obviously the initiatives and the pace of initiatives and the costs, not just the number of projects, but as we've said we now have the store closures as well as the store support (inaudible) consolidation of those costs as well. As we said the costs that we called out really 75% being incurred in the first half roughly as we look at it today, and again I would tell you, of that it's really a one-third, two-third type of situation between the first quarter and second quarter, because as I said, second quarter gets impacted much more just based upon the timing of various aspects of that.

And so what do you see, basically you do see the effect of some additional markdowns as we go through the renovations right? We basically have to move some inventory, there are some things that we discontinue to make room for the $1 product. So to your point, markdowns will continue to be a big piece of that. The other thing you see from a cost perspective is labor, the other piece of this is, we have to have teams that go across the company and do these resets, and so they have that as well as our travel and things like that. So those are couple of the big buckets of costs. So I think that's important.

And then obviously this past year we had the reinvestment in labor again, so we'll call that a one-time investment, but again as we know states continue to increase their minimum wage, so we'll see some pressure from that as well. As far as Snap, we did see benefits in January from the movement of February in Snap to about January 20. I think our calculation would tell you it's about a roughly 30 basis point benefit to the quarter for Family Dollar, and I think that's pretty much in line with what you've heard probably from some other retailers as well.

But again I think what our viewpoint is, as we go forward and we get a late Easter, which we think that it's a little more beneficial typically to Dollar Tree than Family Dollar, but it is typically a good timeframe when we get that late Easter and get that warmer weather and get people into the stores and kind of broaden the product that's there for them to look at. So those are just some of the background, some of the color, we've got going on in Q1, Q2 as we go forward.

[Paul Trussell, Deutsche Bank]

And my quick follow-up is just around store plans, you have an aggressive plan in place around at least 1000 remodels this year. But you mentioned in the press release that that might accelerate further over the following years. So maybe just touch based on how we should think about what percent of the total fleet could ultimately get this remodel, and how does that impact your thought process around opening up new doors and still being a square footage growth story?

[Gary Philbin, President and CEO]

Hey Paul, Gary. I think you're exactly right, we called down a 1000, and the cadence this year and why the impact is in the first half, I want to get these things done no later than somewhere in Q3. And if we can end up doing more of them, we'll try to do that. But the 1000 is based on us getting it done primarily in the first half. It will go into Q3, but we need to get more stores behind us. And I would - we are not ready to call on (inaudible) next year, but certainly I can see 1000 next year as well. We are touching a lot of stores, not just Family Dollar, but Dollar Tree stores too which we haven't talked much about. But with our snack zone delivering a nice comp in the stores that we're putting that in, we're touching 1000 Dollar Tree stores too to drive top line business, and bottom line performance.

So we have a lot of human capital extended this year, and my sense is as we go into the out years, we'll start to ramp up store count at Family Dollar, because we are going to like the phase 2 and not just because of performance, it will also help what we do on our comps as we get more new stores behind us. So I would see not ready to declare '20, but I would say it's going to be a similar renovation count, and I'm going to see some additional new stores as we look out into '20 to say that's the growth factor in places our Family Dollar stores perhaps have been most challenged. And let's put an H2 store in some of the greenfield areas that we can grow the business. So this is a business that we're focused on, we're going fix it, and we're going to grow it, and that's what this initiative is all about

[Operator]

Our last question comes from Kelly Bania with BMO Capital.

[Kelly Bania, BMO Capital]

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

[Gary Philbin, President and CEO]

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

[Kelly Bania, BMO Capital]

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

[Gary Philbin, President and CEO]

Well Kelly you're probably asking more than I can answer. But I would say, what we in both OOPS and Dollar Tree, remember Deals was a single price point banner, and then we converted it to some multi-price, and in fact we took some Dollar attributes along the way and added that to a Dollar Tree deals format. So what's the takeaway? our customers are very loyal to what Dollar Tree represents. We all know that it's a brand, it's not just pricing item it's a brand that they can count on as they walk through the door. And so between what we marketed and how we showed it in store the categories that we put it in, how our customers shop different categories and adjacencies, those are all the things that we captured with the other tests that gave us insight.

And as we go into this, we take some of those learnings to say let's be as smart as we can in what we're trying to achieve in terms of success. And I can't put a timeline on it for you. This is test and (inaudible) you do something, you tweak it and you change it. So that's just been really the discipline we bring to it to make sure we understand what is it we're doing what our customer see, and quite frankly the customer research at the end of day tells us what our customers sees on this. So more to come, we'll go into this with the eyes wide open, based on what we've done in the past, and do it in a very disciplined and logical way.

[Operator]

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

[Randy Guiler, VP, IR]

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

[Operator]

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