Mar 1, 2016
Executives
Randy Guiler - VP, IR Bob Sasser - CEO Kevin Wampler - CFO Gary Philbin - President & COO
Analysts
Michael Lasser - UBS Scot Ciccarelli - RBC Capital Stephen Grambling - Goldman Sachs Dan Wewer - Raymond James Joseph Feldman - Telsey Tricia Dillon - Wells Fargo Securities John Zolidis - Buckingham Research Matthew Boss - JPMorgan
Operator
Good day, and welcome to the Dollar Tree Inc's Fourth Quarter Earnings Conference Call. As a reminder, 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
Thank you, Keith. Good morning and welcome to our conference call to discuss Dollar Tree's performance for the fourth quarter and full year fiscal 2015.
Participating on today's call will be our CEO, Bob Sasser; CFO, Kevin Wampler; and Family Dollar's President and Chief Operating Officer, Gary Philbin. Before we begin, I would like to remind everyone that various remarks that we will make about future expectations, plans and prospects for the company constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors included in our most recent press release, most recent 8-K, Quarterly Report on 10-Q and Annual Report on Form 10-K, which are on file with the SEC. We have no obligation to update our forward-looking statements and you should not expect us to do so.
At the end of our prepared remarks, we will open the call to your questions. Please limit your questions to one and one follow-up question if necessary.
Now, I'd like to turn the call over to Bob Sasser, Dollar Tree's Chief Executive Officer.
Bob Sasser
Thanks, Randy, good morning, everyone. This morning we announced results for the fourth quarter and full year of fiscal 2015.
Total sales for the quarter increased to $5.37 billion and same-store sales on a constant currency basis increased 1.7%. Total sales for fiscal 2015 which included nearly 7 months of Family Dollar sales were $15.5 billion.
Net income for the quarter was $229 million and adjusted net income was $239.4 million near the high end of our range of guidance. EPS was $0.97 and adjusted diluted EPS was $1.01.
I'm extremely pleased with our company's accomplishments in the fourth quarter. Sales were solid and the midpoint of our range of guidance.
SG&A expenses were leveraged and well managed. Our Dollar Tree segment continues to deliver sector leading operating margins and earnings were very near the top of our guidance.
Our customer base is large and it's growing and we continue to meet our milestones and remain on schedule with our integration of Family Dollar. We have truly an incredible opportunity ahead of us as a combined organization and a strategic rationale for the combination continues to be as compelling as ever.
In the early stages of integration, there have been no surprises that diminish our vision and plans for value creation. In fact as we improve retail operations, there is increased enthusiasm for the opportunity to grow and to serve more customers in more ways as a combined company.
We have confidence in our disciplined approach to continue improving the customer experience at Family Dollar and in our ability to capture synergies for the combined organization. With the focus on managing our business in real-time, our eyes are on the horizon as we develop the foundation for a larger, stronger and more diversified business that will generate cash and build shareholder value for years to come.
Only two quarters into the integration our teams are aligned strategically and collaborating effectively to deliver solid results. Accomplishments in the fourth quarter were numerous including another solid quarter for our Dollar Tree banner.
As expected Dollar Tree delivered a low single-digit same-store sales increase. Same-store sales on a constant currency base increased 1.7% and that was on top of a strong 5.6% increase on the fourth quarter a year ago.
Same-store sales increased as a result of growth in both basic consumables and discretionary products, and sales growth was driven by increases in both traffic and average ticket. Top performing categories include party supplies, beauty and eyewear, snacks and beverage, and candy and food.
Geographically, Dollar Tree same-store sales growth was strongest in the Northeast and Midwest. I'm extremely pleased with the consistent growth and strength of Dollar Tree business.
This was the 32nd consecutive quarter of positive same-store sales. That's 32 straight quarters, eight straight years of comp growth, and everything is still a dollar.
Cycling comps are 5.6% last year and through a difficulty in consumer environment, fourth quarter results again validate the relevance of the Dollar Tree brand. Customers are shopping with us more often and we're attracting new customers every day.
And when the customers who are in the stores are buying more, both traffic and average ticket increase for the quarter. Dollar Tree continues to be part of the solution for millions of consumers as they strive to balance their household budgets.
We serve a very loyal and growing customer base. Our commitment is to continue serving our customer, our existing customers better while taking every opportunity to gain new customers in every store every day.
Our merchant teams do a tremendous job sourcing products that exceed customer expectations for what $1 can buy at a cost that meets our margin requirements. Merchandise margin increased in the fourth quarter.
Our store teams are focused on providing a clean, full, fun and friendly shopping experience. Merchandise values at Dollar Tree are better than ever.
As we enter fourth quarter, store presentations boldly communicated a message to our customers that Dollar Tree was the go-to store for basics and your holiday needs. In early November we focused on first of the month basic consumables and Thanksgiving related foods like chicken broth and vegetables and soups.
We placed emphasis on taking care of customer-need related to holiday meals with baking basics, mixing bowls, foil pans, turkey basters and food storage containers. And we addressed the customers need related to holiday entertaining with catering trays, bowls and servers.
Our Home for the Holidays promotion featured dinnerware, glassware, table linens and snack foods like cookies and mints and party nuts, and everything was just $1. Immediately following Thanksgiving, our stores made a swift transition to Christmas holiday decorations, toy land and great gift ideas, and the merchant at stores continue to build on our last ten days strategy by bringing all of the last minute categories together and remerchandising the front of the store with a purpose.
Our goal is to be the gift supply headquarters for items like holiday tents, gift bags, tissue, wrapping paper, scissors and tape. Our customers understand that if you need to wrap it, bag it, box it or tag it, Dollar Tree is the store for you.
If you're buying your wrapping supplies anywhere else, you're paying too much. In addition to our seasonal energy, customers continue to look at Dollar Tree for their basic needs.
Throughout the quarter our stores continued to highlight and promote our million dollar brands. These brands that they know and trust like Pringles, Nabisco, Scotties, Crest Toothpaste and many more.
Looking forward, the Dollar Tree segment is positioned for increased relevance to our customers, sustained growth and improved profitability. We have multiple opportunities to continue growing and improving our business through opening more stores and increasing the productivity of all of our stores.
In the fourth quarter we opened a total of 63 new Dollar Tree stores. We relocated or expanded 11 Dollar Tree stores.
We rebannered 58 Family Dollar stores, two Dollar Tree stores and we rebannered 52 Deal stores to Dollar Tree stores, for a total of 184 Dollar Tree projects during the fourth quarter. Total Dollar Tree banner square footage increased 10.3% compared to the prior year, and we ended the fiscal year with a total of 5,954 Dollar Tree stores across North America, an increase of 587 stores this year.
In addition to new stores, we continue to execute our strategy to improve the productivity of our existing stores. Some of our drive to business initiatives include category expansions.
Customers are realizing more value as we rationalize and expand assortments in pet supplies, hardware, health care, beauty and eyewear as well as home and household products. We're driving the business with a focus on seasonal relevance.
Our store fronts change with the seasons. We want our customers to know what season it is when they come in the front door.
At Dollar Tree we want to own the seasons at the dollar price point. We're driving the business by creating merchandise energy and the thrill of the hunt throughout the store.
At Dollar Tree you always find an unexpected value. And we're driving the business by being first of the month ready.
We place special emphasis on basic consumable core items at the beginning of each month when many customer are shopping for basic needs. We're continuing the expansion of our frozen and refrigerated category.
In fourth quarter we installed freezers and coolers in 142 additional Dollar Tree stores. We currently offer frozen and refrigerated products in 4,287 stores and growing.
Our plan is to roll out freezers and coolers to 400 additional stores in 2016. We are on-schedule with our planned conversions of our Deal store locations.
As we announced in October, we plan to dedicate our full energy and resources to our two primary banners; Dollar Tree and Family Dollar. As planned the rebannering of our 222 Deal stores commenced in January and we are on track to complete this project on-schedule.
We continue to support planned growth with infrastructure and distribution capacity ahead of the need. Construction on our newest D.C.
and Cherokee County South Carolina is on-schedule and on budget. This $1.5 million -- excuse me, 1.5 million square foot automated facility will provide capacity and increased efficiency to support continued profitable stores growth in the southeast and mid-Atlantic regions of the U.S.
We plan to begin shipping product from this new facility in July. To support continued growth in western markets, we are expanding our stock in California distribution center from 525,000 to 820,000 square feet, an increase of 55%.
This project is also scheduled to be completed by mid-year. Turning to the Family Dollar banner we continued to make meaningful progress on the Family Dollar integration.
In fourth quarter, Family Dollar stores completed the clearance of non-go forward product at the beginning of November and quickly moved to the impact of the holiday merchandise set. End-caps were reclaimed for the holiday period and for the January promotional resets.
Systems on hand are cleaner and our service levels continued to improve. Just over two quarters in, the stores are cleaner, the shelves are better stocked.
We cleaned up old inventory and the end-caps are more compelling and relevant. The feedback we're receiving has been positive.
Our customer satisfaction scores has improved validating that the customers are taking notice. Regarding sales for the quarter the Family Dollar banner delivered a low single digit positive comp store sales increase.
Same-Store sales increased as a result in the growth of both traffic and average ticket, with traffic leading the way. Same-Store sales increased in both discretionary and consumables with slightly higher sales growth in consumables.
Sales were positive each month with the strongest sales increases in December. Geographically, comparable store sales at Family Dollar were strongest in the west and mid-Atlantic.
For the fourth quarter we opened a total 65 new Family Dollar stores and we relocated or expanded 42 Family Dollar for a total of 107 projects. Additionally, during the quarter we rebannered 58 Family Dollar stores to Dollar Tree.
We completed the required divesture of 325 stores to sycamore partners at the beginning of the fourth quarter. We ended the fiscal year with 7,897 Family Dollar stores and a total Family Dollar and Dollar Tree combined store count of 13,851 stores across North America.
Just like Dollar Tree our primary areas of focus for Family Dollar stores are on the customer, the shopping experience and the value equation. Merchants and stores are working hard to be first of the month ready and weekend ready.
We are paying special attention to opening price points, national brand pricing, the role of private label products while rationalizing queues for increased productivity and a focus on basic end-stock levels. Additionally, we are in the process of rolling out our smart ways to save program.
The value elements of smart ways to save are a combination of everyday low price elements and items, strategically planned sales and price-drop promotions, incredible $1 value items and an enhanced assortment of named brands, private label name brand equivalents and value brands. In order to earn back our Family Dollar customer's confidence and frequency of visit, we are committed to improving the customer experience.
There is a keen focus on table stakes including store standards and conditions. We want them to be bright, clean and free of clutter.
The customer experience will in stock stores grow easily shop trusted value, focus on the merchandise relevance. We have to add what our customer's need and want.
And we are focused on customer engagements, friendly and informed associates. By identifying and establishing appropriate retailing disciplines and benchmarks, customers are already seeing cleaner aisles with less clutter.
I am very pleased to report that recent results from our customer satisfaction surveys are showing meaningful improvement in fourth quarter versus prior year customer scores and each of our four primary survey categories which are store cleanliness, product assortment, customer service and speed of checkout. Continued improvements in each of these matrix will contribute to Family Dollar becoming the neighborhood store of choice for our customers shopping trips.
We will manage investments and table stakes with the same disciplined approach that we have used at Dollar Tree for many years. Identifying and paying special attention to the customer facing matrix with a focus on return on investment and productivity enhancement while reducing cost leveraging our shared services and back office functions and re-investing some of these savings in the customer.
As we have done at Dollar Tree we will test and learn and we will invest prescriptively while measuring return on our investments. As always, our P&L will continue to be managed line-by-line, quarter-by-quarter with a keen eye on ROI, our quarterly guidance will reflect our expectations.
We continue to have great confidence in our ability to deliver at least $300 million in annual run-rate synergies by the end of the third full year post closing. And as previously disclosed these synergies will be achieved with one time cost of $300 million.
As a reminder, we have identified synergies in four primary areas. First of all, sourcing and procurement; second, rebanner program for optimizing store formats; third, distribution and logistics and fourth, overhead and corporate SG&A.
We still have a lot of work ahead of us but at this stage we are clearly on track to achieve our first twelve months milestone of at least $75 million in run-rate synergies. Plans and processes to capture sourcing and procurement synergies are well under way.
Our exact item match initiative to provide the lowest cost on identical items across both banners is complete with expected results, no surprises. The review of similar match items continues with outstanding results, there is more to come here.
We are achieving planned savings from harmonizing our payment terms, auction RFPs in a formal bid process are well under way on expense items. Our savings continue to grow and meet expectations.
During the fourth quarter, we rebannered an additional 58 Family Dollar stores to Dollar Tree bringing our total of converted stores for fiscal 2015 to 205 stores. This slightly exceeded our target of 200 conversions for the year.
The preliminary results are meeting expectations and feedback from customers has been positive. With plans to convert an additional 100 Family Dollar stores to Dollar Trees in 2016 and our analysis will continue.
Ultimately, our strategy is to have the right banner in the best location to serve our customers. We are finalizing the supply chain roadmap and we will soon be piloting our first co-bannered distribution center.
With the cross-organizational functional team we are integrating our warehouse management systems and we are making plans to rationalize the fleet of combined DCs, analyzing space needs by banner and determining our ability and the merits of shipping both banners out of all facilities. This is a very large project with significant opportunity for long-term synergies.
Our first pilot facility in St. Georges, Utah, is planned to be operational before the third quarter.
We continue to make progress on reducing cost through our shared services model. We are combining back office functions to support both banners through our shared services organization.
Overtime, these shared services will include human resources, finance, information technology, supply chain and logistics, indirect sourcing and procurement, real estate and construction, legal, strategic planning and internal audit. Our goal is to provide consistent, efficient support of our business initiatives across the combined organization through a more cost effective approach.
We are less than a year into the integration and we have made tremendous progress. We still have a great deal of work ahead of us.
The timing of some would be dependent on our IT integration, our strategy is not to touch everything at once, but to prioritize our areas of focus, to get it right the first time and the build the overall business for the long term. It's a process.
We are employing a well-planned, thoughtful, low risk strategic approach that will benefit our long term shareholders. Now I turn the call over to Kevin to provide more detail on our fourth quarter financial performance and our initial outlook for 2016.
Kevin Wampler
Thanks, Bob and good morning. As a result of the acquisition year-over-year comparisons are difficult however, we have included tables with our press releases which we believe will help be helpful in better understanding the components of our business.
Total sales for the fourth quarter grew 117% to $5.37 billion which includes over second full quarter of Family Dollar sales. This was at the midpoint of the sales guidance range of $5.32 billion dollars to $5.42 billion.
Dollar Tree segment sales increased 8.6% to $2.69 billion while Family Dollar segment sales decreased 2.7% to $2.68 billion. Year-over-year sales comparisons for Family Dollar were impacted by 205 rebannered stores and 325 divested stores.
Same-store sales on a constant currency basis increased 1.7% versus a very strong 5.6% in the prior year's fourth quarter. The increase was driven by both traffic and ticket.
Adjusted for the impact of Canadian currency fluctuations same-store sales grew 1.3%. All of the recently acquired Family Dollar stores and newly rebannered Family Dollar and Deal stores are considered new stores and are excluded from our same-store sales calculation.
Gross profit for the combined organization increased by $734.5 million or 80% to $1.65 billion for the fourth quarter 2015 compared with the prior year's quarter. Majority of the dollar increase was driven by Family Dollar's gross profit of $673.7 million.
Gross profit margin for the Dollar Tree segment was 36.4% during the fourth quarter compared with 37.1% in the prior year's fourth quarter. Approximately, one-half of the 70 basis point decline as the percent of sales was related to actual accrued markdowns associated with the planned conversion of all Deal stores locations.
Other factors contributing to the year-over-year decline in gross margin rate was occupancy cost, higher distribution cost and shrink partially offset by improved merchandise cost. Gross profit margin for the Family Dollar segment was 25.2% during the fourth quarter compared with 25.1% in comparable period prior year period.
Including the $15.9 million of indoor step-up amortization, gross profit margin was 25.9% for the quarter, the improvement of 80 basis points on a comparable basis driven by improved mark on and lower markdowns partially offset by higher occupancy costs. Selling, general and administrative expenses in the quarter for the combined organization increased 121% to $1.18 billion from $534.5 million in last year's fourth quarter.
The majority of the $648.4 million increase related to $608.4 million of Family Dollar expense. Q4 SG&A expense for the Dollar Tree segment as a percent of sales was 21.4%, a 20 basis points to sales improvement compared to the prior year's quarter.
The current year includes $3.3 million of acquisition and integration related cost while the prior year included $6.7 million of acquisition related cost. Excluding these costs, adjusted SG&A improved to 21.2% for Q4 compared to 21.3% for the prior year's quarter.
This ten basis point improvement was driven primarily by payroll related cost including retirement plan contributions and store bonuses and was partially offset by higher operating and corporate expenses including legal fees and cost associated with the Deal store conversion. SG&A expense for the Family Dollar segment as a percent sales was 22.7% compared to 20.6% in the prior year's quarter.
The current year includes $19.3 million for favorable lease rights amortization, $16 million in additional depreciation for useful life and fixed asset revaluation, $8.9 million of severance costs and integration costs. The prior year's comparable period includes $10.8 million of acquisition related cost.
Excluding these costs, SG&A increased 70 basis points as a percent of sales to 20.9% from 20.2% in the prior year. The increase was primarily driven by increased incentive compensation, repairs, professional fees and divested share related costs.
Adjusted operating income and excluding acquisition and integration related cost for the Dollar Tree segment increased $17.4 million to $407 million, as a percent of sales adjusted operating income decreased 50 basis points to 15.2% compared to 15.8% of sales in the prior year's fourth quarter. Adjusted operating income for the Family Dollar segment increased $1.9 million to $134.0 million.
Year-over-year comparison was impacted by 205 rebannered stores and the divestiture of 325 Family Dollar stores. As a percent of sales adjusted operating income increased 10 basis points to 5% compared to 4.9% of sales in the prior year's comparable period.
Non-operating expenses for the fourth quarter totaled $117.2 million and were comprised primarily of net interest expense of $114.9 million in the quarter which included an acceleration of $19 million in non-cash deferred financing cost associated with our pre-payment of long term debt of $1 billion in January. For the fourth quarter, the company had net income of $229 million and $0.97 per diluted share.
Adjusted net income and adjusted earnings per share as detailed in the press release tables were $239.4 million and $1.01 per diluted share. Our effective tax rate for the fourth quarter was 35% compared to 36.4% in the prior year's quarter.
The decrease was primarily attributable to an increase in the work averaging tax credits or relation to the income for the fourth quarter and a decrease in state tax expense. Looking at the balance sheet, combined cash and cash equivalents at yearend totaled $736.1 million compared to $864.1 million at the end of Q4, and as noted we did make a $1 billion debt pre-payment in late January.
Our standing long term debt is now approximately $7.5 billion. Inventory for the Dollar Tree segment at quarter end was 18.9% greater than at the same time last year while selling square footage increased 10.4%.
Inventory for selling square foot increased 7.7%. The primary contributors to the year-over-year increase in inventory levels relate to the West Coast port disruptions experienced a year ago and earlier Eastern 2016 and an earlier Chinese New Year.
We believe that current inventory levels are appropriate to support schedule the new store openings and our sales initiatives for the first quarter. For the Family Dollar segment, end of year inventory on a selling square foot basis increased 0.6% compared to the prior year.
We are pleased with the progress were seeing on in stock levels of key items. We are continuing to review merchandise assortments and believe our current inventory levels are appropriate for the first quarter.
Capital expenditures were $144 million in the fourth quarter of 2015 versus $71.2 million in the fourth quarter of last year. For fiscal 2016 we're planning for consolidated capital expenditures to range from $650 million to $670 million.
Capital expenditures will be focused on new stores including 350 new Dollar Tree stores and 200 new Family Dollar stores. The remodel, relocation or expansion of approximately 200 stores, rebannering of approximately 100 Family Dollar stores to Dollar Tree stores, and the rebanner of the 158 remaining Deal stores for a total of more than 1,000 store projects in 2016.
In addition, we'll add frozen and refrigerate capability for approximately 400 Dollar Tree stores. We have IT system enhancements and integration projects.
The completion of our new Cherokee County South Carolina's distribution center and the completion of our stock in California distribution center expansion. Depreciation and amortization totaled $174.9 million for the fourth quarter.
This includes purchase accounting related cost of $19.3 million for favorable lease rights amortization and $15 million in depreciation for useful life and asset revaluation. Depreciation expense was $54.4 million in the fourth quarter last year.
For fiscal 2016 we expect consolidated depreciation and amortization to range from $630 million to $640 million. This range includes increases over the historical run rate of depreciation and amortization expense for Family Dollar for two items which were included in our guidance.
First, it includes $8 million for Q1 and $5 million for Q2 depreciation above the historical run rate for Family Dollar as a result of harmonizing the depreciable-wise accounting policies of the two companies, and the increase in the value of the assets based on the purchase price allocation. Secondly, includes $18.7 million for Q1 and $74 million for fiscal 2016 for the amortization of favorable lease rights for the purchase accounting valuation of Family Dollar leases.
Turning to sales and earnings per share guidance. For modeling purposes, our initial outlook for 2016 includes the following assumptions.
As a reminder, at the beginning of Q4 2015, we divested 325 Family Dollar stores that represented approximately $500 million in annual sale and $45.5 million in operating income. Our same-store sales calculations exclude Family Dollar stores and excludes stores that are rebannered.
These stores will be included in our same-store sales calculations when they have been opened as a Dollar Tree for 15 months. We will continue to experience a higher to normal degree of cannibalization to Dollar Tree comps as part of our rebanner efforts.
This cannibalization expectation was planned and factored into both our rebannered strategy and analysis, and our outlook for same-store sales. We will continue our initiatives to rebanner stores.
First focusing on rebannering all Deal stores and then we plan to convert an additional 100 Family Dollar stores to Dollar Trees. Each will be one week earlier than the prior year.
This represents an estimated $10 million head wind of sales. Inventory step up amortization will be approximately $6 million in Q1 and $2 million in Q2.
We are budgeting lower diesel fuel cost than a year ago with the first half providing the most benefits. Interest expense will be approximately $90 million per quarter in 2016.
And we do not anticipate any share re-purchases in 2016. We cannot predict future currency fluctuations so we have not adjusted our guidance for changes in currency rates.
Our guidance also assumes the tax rate of 36.6% for the first quarter and 36.8% for fiscal 2016. Weighted average diluted share counts are soon to be 236.4 million shares for Q1 and for the full year.
For first quarter we are forecasting total sales to range from $5.05 billion to $5.12 billion and diluted range per share on a GAAP basis in the range of $0.75 to $0.83. These estimates are based on a low single digit same-stores sales increase and year-over-year per footage growth of a 132%.
Sales & earnings per share outlook for the full fiscal year we are forecasting total sales to range from $20.76 billion to $21.11 billion and diluted earnings per share on a GAAP basis in the range of $3.35 to $3.65. These estimates are based on a low single digit same-store sales increase and 4% sales footage growth.
I will now turn the call back over to Bob.
Bob Sasser
Thanks, Kevin. I want to close the strategic rationale for the Family Dollar acquisition is as compelling as ever.
This is an extremely large and complex transaction involving more than 13,000 retail store locations and 23 distribution centers. While we are still in the early stages of the integration process, I am very pleased with the process and our progress.
Gary Philbin and the leadership team at Family Dollar are working the plan effectively and efficiently. We continue to have great confidence in our ability to deliver at least $300 million in annual run-rate synergies by the end of year three, I believe we can exceed these expectations.
These synergies will be achieved for a combination of lower end cost, both direct and indirect sourcing, banner optimization, logistics and overhead. I am extremely proud of our combined Family Dollar and Dollar Tree teams.
They have accomplished extraordinary feats in very short time. But this is just the beginning.
There is much more to do and I will tell you as always we will employ disciplined approach to driving key strategic initiatives to the combined organization through improved communication, analysis, collaboration and incentives. We are confident in placing our initial emphasis in these areas can materially enhance operating performance of the Family Dollar brand through improvement in sales, margins, expense control and greater customer satisfaction.
I will close the prepared remarks by saying that the Dollar Tree business model is powerful, flexible, and more relevant than ever, providing extreme value to customers, while recording record levels of earnings. Our model has been tested by time and validated by history.
For 3 consecutive quarters Dollar Tree banner has delivered positive same-store sales increases through good times and difficult times and all retail cycles consumers are looking for value, no matter what the state of the economy. While on price point remains a dollar, our operating margin continues to lead the discount sector.
With the addition of Family Dollar, we are larger, stronger and more diversified business, better able to grow in more markets while serving more customers with exactly what they are looking for, great value, in every store, every day. Our future has never been brighter.
Operator, we are now ready for your questions.
Operator
Thank you, sir. [Operator Instructions] We'll take our first question from Michael Lasser with UBS.
Please go ahead.
Michael Lasser
Good morning, thanks a lot for taking my question. It's on a core Dollar Tree business.
It's that they were caught in a row where their comps were below 3%, are you seeing any indication that your running into some limitations of your merchandise flexibility with the single price point model and along those lines what are you anticipating on the merchandising side to see the benefit given in what some of the Asian currencies have done and given how much that you should source your product overseas and then have a big follow-up. Thanks.
KevinWampler
Michael, thanks for the question. To the first part of the question, we are not limited by the merchandise assortment or the price point.
We have more assortment than ever, our values are better than ever, our stores are larger. There is more merchandise and more assortment than we ever had, so there is no limitation to that.
If you look at fourth quarter largely, we're up against a very big fourth quarter last year, 5.6% comp in the year before. So basically, in sort of a tough economy, we are up against a fairly difficult comparison, 5.6% and I think that 1.7% in comp is admirable considering the what we faced with that comp last year.
As to China, our sourcing continues to be strong and vibrant, we still import a lot of product. About 20% of our business is in product that we import and that continues.
Our pricing of China has been very positive. We have been able to not only improve values in our product by taking a lower cost on the, turning that into more value for the customer but also we have been able to reduce cost on the things we buy every quarter, every year that we keep in our stores all the time, so the basics we have been able to reduce cost on that, especially on the last trip so, you had a follow-up question?
Michael Lasser
Yes, my other question was on the guidance for the year. What have you assumed on wage increases, additional investments in the stores and the cost to harvest the synergies within your outlook for [indiscernible].
Thanks so much.
KevinWampler
So Michael, as we work to put our guidance together for the full year obviously, take all of the things into consideration. Obviously from a wage perspective, there are continued to be certain dates in the US as well as providences in Canada continue to raise their individual minimum wages and obviously we put those into the mix as we look at our business, no difference in any other year and to the point, we have historically said we are competitive in the markets we are in and that's important because you have to be to, to get good employees at the end of the day.
So I don't think that's really changed within the guidance. As you look at the synergies and you look at the cost to achieve, obviously we have an expectation that we will achieve synergies this year.
There are synergies baked in, we have specifically said the dollars and part of that is the timing a little bit hard to nail specifically down with we are well on our way to meeting or beating the first year run-rate of $75 million of synergies so I think we have baked things in accordingly, but still a lot of work to be done to make that happen but we feel good about where we are at today.
Michael Lasser
Okay. Thank you so much and good luck with the year.
Operator
Our next question comes from Scot Ciccarelli with RBC Capital.
ScotCiccarelli
Good morning, guys.
KevinWampler
Good morning.
ScotCiccarelli
The first question is, is there an estimate that you guys have in terms of the impact of cannibalization in the quarter? Obviously, Kevin you made that reference that means you talked about last quarter as well?
KevinWampler
Yes, I think as we look at it, obviously analyze it, we analyze it going into it as we said within the prepared remarks, and that the expectation was there that there was going to be some effect and it was little less than half a percent but I think it is exactly where we expected it to be. So in some ways, that was all related to rebannering, so in some ways you can say that without that we would have been above a two, but I think we all know that for the improvement of the business we are doing the right things with these rebannering.
They are going to be great stores, great opportunity to put the best store in the best location for our customers and put our best foot forward and it will show in the bottom line as we go forward, so I think that's the way we think about it.
ScotCiccarelli
Okay. That's helpful and then, is there a synergy number that we can kind of think about for the quarter that's just completed or is the bulk of that $75 million going to happen in the first half of 2016, just given the timing issues that you already mentioned?
KevinWampler
Yes, I think as we think about it there is probably more to the back app a little bit. There is a little bit within the first quarter but we are not really going to speak to a specific number at this point in time but it is built into our guidance.
ScotCiccarelli
And was there anything that you were able to capture in the fourth quarter that you can outline?
KevinWampler
Yes, I think obviously there was a little bit in the fourth quarter that relates to the exact match process that Bob spoke to in his comments. The merchants worked hard on that and there was some of that that did go into effect in a sense.
What you got to remember is you already got merchandise on hand basically at the prior price so it takes a while to work to the system to see the benefit, it's a kind of way you need to think about that.
ScotCiccarelli
In other words, just prepared a final clarification here. The bulk in the synergies for first year, are we going to start to see accelerate in 2Q of '16
Bob Sasser
I think we have to start to definitely see some things hitting that will make a difference.
ScotCiccarelli
Got it. Thanks a lot guys.
Operator
Our next question comes from Stephen Grambling with Goldman Sachs.
Stephen Grambling
Good morning. Thanks for taking my questions.
Well just a follow up on the guidance, can you just provide a little more color on how you think about the profitability by segment, maybe excluding the synergies which -- whatever the high level puts tick to think about ours?
Bob Sasser
At this point we're going to give guidance as a combined company. I think if you look at it, at the midpoint of our guidance, our operating margin for Q1 basically gives about a mid-7% number.
If you look after the full year, you're at the high 7% approaching 8%. We're going to give guidance as a combined company.
We'll give you color at the end of each quarter. But that's how we're going to factor that as we go forward.
Stephen Grambling
Okay, fair enough. And then is there any detail you can provide on what you're seeing from these rebannerings as relates to the productivity so far and profitability, and then any other color you can provide on the next group of stores and how they made different from the first set.
Bob Sasser
Yes, I would tell you that the rebanners are meeting our expectations. We started off as you know with an analysis of the stores that we thought could be better serve the customers as a Dollar Tree than a Family Dollar, and Family Dollars that were underperforming frankly because obviously we can improve the performance of those Family Dollar store by turning into Dollar Tree.
We would like to take a look at doing that. We modeled against the Family Dollar, or the Dollar Tree model to come up with a large list and then we went through the process of reviewing those stores, actually going out and sending people out to visit the sites and put their eyes on it as well as having the analysis.
So from that is how we pick the first 200, 300 stores now. We'll continue the analysis.
I would tell you that haven't learned a whole lot different from what we first did in regard to, and analyzing the Family Dollar stores again. They were underperforming Family Dollar stores that we put through the Dollar Tree real estate model, and from the Dollar Tree real estate model reach in with a sale projection, and from that we knew what we thought we could do as a Dollar Tree.
So that's how we choose them. I don't think there is, it's really early.
One of the reasons we're doing a hundred this year instead on maybe more is the fact that I would like to let the first 200 sort of burn in and have a few months. Some of them we've only had a few weeks on with results and mostly we only had a few months.
So with a little more time then I think we'll probably find some more opportunity to improve that model and to improve the location and rebannering project. But I would tell you it's exciting, the rebannering is absolutely hitting our expectations to what we can deliver.
And by the way I think by running better stores, then obviously we can improve as we do in all Dollar Tree stores from opening to really going after the customers in those markets and running great stores for those neighborhoods.
Stephen Grambling
Thanks so much. And lastly, if I can then I'll yield.
But on a transition service agreement you had talked about with the divested stores were then placed in the quarter. Is there any way to emphasize that?
Thank you.
Bob Sasser
The TSA was in place in the quarter obviously from a standpoint of were divested of the 325 stores at the beginning of the quarter. We do support seeking more partners for these stores on an ongoing basis.
And again as we called out last quarter, there are certain costs that we are incurring and expect to incur as part of that. On the flip side of that we do get some reimbursement as per the TSA for some of those services provided.
It was on a go forward basis and my expectation is that it will be hopefully, it's fairly neutral but it's not totally known based on all the services that we have to provide, but we will be providing accounting services. The merchandise is still bought and distributed by us to those 325 stores.
Yes, we're really accounting services and HR services and various things like that. So it's a fairly involved process realistically.
Stephen Grambling
Great. Thanks so much.
Best of luck this year.
Bob Sasser
Thank you.
Operator
[Operator Instructions] We'll go next to Dan Wewer with Raymond James. Please go ahead.
Dan Wewer
Thanks. Hey, good morning, Bob.
Bob Sasser
Good morning, Dan. How are you?
Dan Wewer
Good. How are you doing?
Bob Sasser
I'm terrific.
Dan Wewer
On the 1% to 2% same-store sales gain at Family Dollar, were you initially thinking it could be a bit better than that given that you've taken the 200 underperforming Family Dollar stores out of there comp pays and as you eluded to the in stores banners are better, in stock levels are better. Do you feel like the Family Dollar segment could have achieved a little bit better same-store sales growth?
Bob Sasser
It's early, Dan. I think we can achieve better and more consistent same-store sales growth at Family Dollar, but there was a lot going on there including a clearance event that has ended sometime early November, and changing around the store, the end caps, getting rid of old merchandise, working on improving the in stock position setting, holiday merchandise that has already been bought and displaying that appropriately, and just engaging in the customers.
So they really accomplished a lot of things at the Family Dollar business early on in addition to all the synergy work that's been done there, and combining with the shared services. So a lot was accomplished there.
I'm pleased with where we came from with the Family Dollar. Frankly, when we divested 325 stores, $500 million in sales, we rebannered 205 stores.
All those moving pieces have an effect on the base. It's a lot to do for an organization in a short period of time, and at the same time the business environment in fourth quarter for consumers just wasn't as robust as you might have wanted to be.
So let's give it a little more time. I expect it's going to continue to improve and I have great confidence in the management team to do the things to focus on the customer, engage with the customer and provide more value in that business, which that's where we're putting our focus.
Just like Dollar Tree, we're going to run great store, we'll win by running great stores at Family Dollar.
Dan Wewer
Then a follow-up, also related to revenues. But when you look at the core segment, the Dollar Tree store sales per square foot is now the highest I believe since 2002, and of course back paying your stores were only -- the prototypes were only half of the size that it is currently.
With that in mind, just mathematically, it's really difficult to get to 3% and 4% same-store sales growth because the denominator is so large. So now going forward, do you think 2% is kind of the appropriate bogey for the core segment same-store sales?
Bob Sasser
I wouldn't agree on the 3% to 4% not being out of reach or even more. I mean it's really about how well we served the customer and there are some headwinds out there from time to time in the economy and the economic environment, employment and all those things that we sort of whine about that we can't do much with.
But at the same time they cycle in, they cycle out, and over the longer haul we can do more in our Dollar Tree stores. Our sales productivity per foot is not at the peak of where it can be.
There is always or things that we can do, by expanding categories that are growing, by pulling back on categories that are declining by increasing the value, the idea of buying better with a combined larger company and leveraging the power of our vessel to buy better, to distribute goods better, the logistics costs, we have to be able to leverage those for both banners and provide more efficient and better supply in merchandise in stores. So model as you wish, but for the long haul I believe that our Dollar Tree can remain vibrant for years to come.
Dan Wewer
Do you think that you're at a point where maybe you need to reinvest some of that industry leading margin in the Dollar Tree segment back into the market share initiative?
Bob Sasser
We should always take a look at that and we should always let the market and the customer be our guide on what the value equation needs to be. Everything's a dollar, other retailers will raise or lower their prices.
At Dollar Tree we change the product, we improve the value or take a little more in margin so we will continue to do that. I will tell you this though.
There is really room, there's a lot of room in our operating margin to improve and one of the things I am most proud of is the sector leading operating margin and there's a few things we can do to improve that even though its sector leading, we can continue to grow that. We don't have to take away from it to invest in our customer.
We can run our business better still and it's driven by a few factors. First of all, we got to improve our DC cost.
By improving our DC cost we will be able to improve our operating margin by the use of better staffing models and leveraging engineer standards we can improve our DC cost. Our shrink is higher than it should be.
It's grown over a last couple of years. We can improve that.
We have always been able to run a very well managed shrink component in our business and I expect that we are going to get back to a better shrink number. Unfortunately, shrink as you know as a tail once you know it and see it then all the initiatives you do to bring it back in line, don't show up until you cycle through some inventories in the line but we are on top of it and we can improve our shrink.
We will leverage our occupancy with our comp store sales increases with 32 straight quarters whether its 2%, 3% or 4% we will continue to leverage those fixed costs with our comp sales increase. And another big thing is by leveraging the combined companies as an individual banner, one plus one doesn't equal two here.
If we start bringing together our shared services for both banners, we are going to lower costs across both banners in the back office function. So there is room for us to continue to grow our comp sales, there is room for us to continue to invest in our customer, be relevant and offer the best values in the business for a dollar and at the same time improve our operating margin.
Dan Wewer
Great, thank you.
Bob Sasser
You're welcome.
Operator
And our next question will come from Joseph Feldman with Telsey. Please go ahead.
Joseph Feldman
Hi guys, good morning. I wanted to ask, you made a comment about the integration of systems and technology and I guess I just wanted to get an update on where that does stand because -- and how you're kind of platforming across the two businesses?
Kevin Wampler
Joe, well we have got a plan, a roadmap to, we are not doing everything in one time. Something's have to be done before you do the next step by the way, but we have a plan for that over the next three years of systems integration.
We are doing a lot of work around what, bringing together shared services as priority, being able to for example get everyone on the same financial system so that we can pay all the bills the same way using the same system. We are currently -- you heard me reference St.
Georges, Utah, and we're currently working on combining and integrating the WMS systems. We are taking a Family Dollar bannered DC in St.
Georges, Utah and we are doing that right now. We will start receiving sometime April-May, the Dollar Tree merchandise along with Family Dollar merchandise and we will start shipping testing after that.
Shortly, after that it's a plan and of course, we get that right and we are confident we can do that other places, then we will begin rolling out and combining some others DCs as appropriate to do two things. One is to give us more capacity in the buildings we own whether it's Family Dollar that needs the capacity or Dollar Tree that needs the capacity by being able to ship both banners out of any building, will enable us to use capacity better.
And secondly, to improve the cost structure by rationalizing the DC network, getting the DCs in the right places to serve the right banner. So, that's some of the priorities that we have.
We are going to keep the merchandising separate and some of the back office things to do with merchandising we will try to leverage but, Family Dollar buyers are going to be buying using Family Dollar systems and Dollar Tree will using the Dollar Tree systems. As far as retail purchasing right now we are going to combine some of the back office things and leverage our international sourcing, leveraging freight rates across both banners, leveraging our international organization across both banners, our QA, QC, all of those things we would be leveraging.
So that sort of gives you a color. There is a roadmap for the entire network system by system and it spans throughout the next three years with the most important things to clean the most value at the earliest at the front end.
Joseph Feldman
Thanks. And just as a follow-up, can you help dimensionalize this $300 million in opportunities.
I know there is this 4 buckets, I know about some of the merchandising ones probably coming earlier in the process of the three years but how should we think about how big each bucket is, going forward?
Kevin Wampler
Yes, as we have talked to them, the four buckets, the biggest one by far is the procurement bucket which includes both merchandise and non-merchandise spend basically and that's roughly, its over 60% of the overall $300 million, that's very wide net as you might imagine and not only when you think about all the things we buy, merchandise is merchandise, but when you look out to all those services and goods we buy as organizations, being able to leverage that across both organizations. Streamlined processes determined the best way to go forward for both banners is really very exciting and very powerful.
So, that by far is the biggest bucket. The second biggest bucket that we have spoken to in the past is the rebannering process and taking under-performing stores and turning them into stores that are performing at a higher level at an average Dollar Tree rate so, that's the second one and the third and fourth buckets are smaller.
We have always said the distribution, logistics has the chance to be a number but it's a longer term project. So, to Bob's point when he was speaking to work being done today looking at systems and how do you ship both banners out of one distribution center that potentially has some big paybacks but it's a little further down the road so that's kind of directional how to think about it.
Joseph Feldman
That's helpful, thanks guys. Good luck with the quarter.
Operator
Our next question comes from Matt Nemer with Wells Fargo Securities.
Tricia Dillon
Good morning. This is actually Tricia Dillon for Matt.
So I just had a question first on the core Dollar Tree margin that came in a little lighter than we expected and down versus last year compared to I think your expectations are relatively flat. Even as the deals marked down and if a deal came in a little above our expectations, just want to get a comment on what was different there versus your expectations in both segments and then I just had a follow up?
Kevin Wampler
Yes, I think on the Dollar Tree side of the equation, I think the deal was marked down by a known number and that was by far the largest portion of the decrease in our growth profit, on a lower comp we don't get as much leverage on occupancy and distribution as we normally would and again to the point of what we are trying to do there and it's about we know we can do better from a distribution standpoint and then shrinking the other item which we know we are not happy with our other performance this year and obviously have teams focused on that but that was a head win. What was really positive at the end of the day was that our merchandise cost continue to be better.
The mark-on was up so we are buying better, freight was a benefit so a lot of things going really well there and that's very positive. And then, we will continue to be positive I believe as we continue to go forward.
I think the other thing I would say about the Dollar Tree business is even on a lower comp for the quarter and even the year we are able to leverage our SG&A expenses so to me that's very powerful to the model. There is a lot of companies that would not be able to leverage their SG&A at this type of a comp level so I guess part of our disciplined approach as we go forward.
I think speaking to the Family Dollar business, I think in general the gross profit came in about where we thought it would, I think it would make some good strides the team that is working there, again a lot of work being done to make sure that the best net the cost that we can in a system and be able to track that and base our business off of that. So I think that's very positive.
I think as we spoke to in the prepared remarks, some of the head winds is far from a comparability stand point relate to incentive compensation, divestiture cost and some things like that. So over all I don't know if there were a lot of big surprises.
Obviously if sales maybe would have been more towards, the good thing is sales were on the middle of the range, earnings were at the top end, towards the top end of the range. So I think the flow through is actually pretty good at the end of the day.
So I think that's how we think about it.
Tricia Dillon
That's very helpful, thanks. And then just a quick clarification on the full year EPS guidance, last quarter you provided a reconciliation with CO adjustments leading to adjusted EBITDA.
And just wondering if you can help us understand what those same adjustments would be for your '16 guidance?
Bob Sasser
Yes, I think we've really laid them out to you in the sense of the prepared remarks. Obviously, we talked about the fact that the inventory step up amortization is $6 million in Q1 and $2 million in Q2.
As we look to the purchase accounting items that we've talked about since the day of the first quarter you'll continue to see lease, favorable lease rights, amortization, it's about $18.7 million for Q1, $74 million for the year and that $18.7 million steps down about $200,000 a quarter roughly at the end of the day. And then you have additional depreciation above the historical run rate related to the revaluation of assets in the change of policies, and basically that's about $8 million in Q1 and $5 million in Q2.
So those are really the items as we see it. So that's again what we gave them to you today in the prepared remarks and that should help you be able to do any of the adjustments that you want to within your processes.
Our view point is we gave GAAP guidance today, that's we're going to continue to give GAAP guidance on a go forward basis. We think that's obviously the cleanest way.
Obviously we're required to do that to begin with. But secondarily, the items are known, the adjustments are known now.
I think everybody understands them and I think it will be cleaner for everybody.
Tricia Dillon
Great. Thanks so much.
Operator
Yes, we have a time for a few more questions. We'll go next to John Zolidis with Buckingham Research.
John Zolidis
Hi, good morning and thanks for taking my question. My question is on merchandising at the Family Dollar stores.
When you take a look at those stores and compare the model to the core Dollar Tree, is there any idea that maybe you can add some new categories of products to Family Dollar that might help to improve the productivity that simultaneously wouldn't take away sales from your core Dollar Tree stores?
Gary Philbin
Hey John, Gary Philbin. Good morning.
Let me start by maybe just describing one of the reasons we did the acquisition was to have two compelling banners. So this is not an exercise to turn Family Dollar into Dollar Tree, and so we are rooted in the customers' reserve and where we serve them.
So I'd like to make sure we're very clear, we're going to have a very productive Family Dollar banner with compelling assortments that we think fit the bill for the folks that shop us and that revolves off a lot around first of the month in delivering basics and giving them items that on discretionary basis they need to ground up their shopping trips. So starting with that I would say that's where we're grounded.
But part of the synergy effort is having our merchants sit together, and just got back from our most recent trip in China where both our Family Dollar and Dollar Tree merchants are able to sit in the same room and take a look at items. And so that's going to be a piece, trip after trip where merchants can sit in the same room and find the things that fit for Family Dollar, that for us means opening price point, great value, items that can imported that are private brands.
All those things are going to take shape as we continue the iterations of our merchants gained together. So there is going to be some items that you might see in both banners, but if you're ever going to a Dollar Tree or Family Dollar and mistake one for the other we really miss the mark on that assortment.
You're going to see two compelling stores in assortments and quite frankly even on the real estate side, where they left, which truly is a growth curve for both banners as we go forward. So I hope that helps.
John Zolidis
Thanks a lot for that answer.
Operator
And we can take our final question from Matthew Boss with JP Morgan.
Matthew Boss
Thanks guys. So as we think to the spring versus the fall of this year, what category should we keep an eye on in Family Dollar stores, more on the merchandising and the pricing front?
And then anything to watch on the circular and promotional cadence?
Bob Sasser
Of course we start with delivering the basic side to our folks. We have 12 holidays a year, it's called first of the month.
So we're spending a lot of energy at Family Dollar and making sure that our stores are ready. The investment that we want to make with our customer is really a kickoff around that time of the month where folks have money in their pocket to spend, and we want to be ready.
So all the things that we've been working on, getting the non-go forward inventory clear down to get our hands better so that we can have our shelves better stocked. That's the effort we've made up to this point to go into the spring time.
Now obviously we got Easter holiday ahead of us going into a season that is obviously spring and summer after that. But I would tell you an awful lot of what we're working on is delivering the basics everyday which our customer research says they'll give us credit for that if we're able to deliver on that week in, week out, month in, month out.
As far as promotional strategy, you might see we introduce smart ways to save, which really for me is a way of trying together what our customers are going to see. Our ads will reflect our stores, and so when you think about how you ought to save at a Family Dollar our customers are giving us credit now for everyday a little price, of course we've always had traffic drivers on our sale items.
The company even before we bought them certainly had over $1,000 wow items in the store that customers love to shop. We have extensive private branch program that certainly lend, it's tough to compare and say I mean what we're introducing is price drop which is nothing new compared to other retails, but for us it's a way of delivering value to our customers in some of the items they shop most often.
And so it's another arrow in our quiver that allows us to deliver value to our customers in a monthly basis, and truly a way of showing from ad to the store to even how we think about our customer shopping patterns, how the other come into a Family Dollar and shop. So we think it's an exciting kickoff and really gives our merchants and really great support from our vendor community.
Another way to drive more incremental cases at Family Dollar.
Matthew Boss
Great. And then just a follow up.
With some of the tougher comps behind us, I guess just any comments on current business and within your 2016 guidance, what base case level of debt pay down is implied to get to the $360 million interest expense? Is there any opportunity for additional pay down as the year progresses and just where do you see the leverage ratio exiting the year?
Kevin Wampler
I'll take the debt piece, Matt. Basically the $90 million a quarter of interest there and $60 million assumes no additional pay down at this point in time.
So obviously if we make the determination as we work to the year that we're ready to pay down additional debt it could have a positive effect, but at this point in time within the guidance there is no assumption of any additional pay down. So that's kind of where that stands at this point.
Bob Sasser
As far as current trends, obviously we've finished one period out of the three so we still got two period to go on the quarter, but I'm pleased with where we are. It's always -- you usually get a weather report sometime in February and when weather was adverse, it wasn't as good as we thought but overall we ended up with a good first period and on-track for a very good quarter.
And frankly, I'm looking forward to a period of time when we don't have those disruptions like we had last year from the port strike, and I think you can see in our inventory, we have the inventory that we should have had last year. We have that inventory this year, so my expectation is that we're going to have a, we're on track for a good first quarter.
Easter's a little early, the early Easters at Dollar Tree aren't usually good, so we've said that's a $10 million head wind. But at the end of the day, we've given you our first quarter guidance and any color on that is we're on track.
Matthew Boss
Great. Best of Luck.
Bob Sasser
Thank you.
Operator
And ladies and gentleman, this does conclude today's Q&A Session. I'd like to return the floor to Randy Guiler for closing comments.
Randy Guiler
Thank you Keith, and thank you for joining us for today's call and for your continued interest in Dollar Tree. Our next quarterly earnings call is tentatively scheduled for Thursday, May 26, 2016.
Thank you and have a good day.
Operator
And this does conclude today's program. Thanks for your participation.
You may now disconnect. Have a great day.