Aug 25, 2016
Executives
Randy Guiler - Vice President of Investor Relations Bob Sasser - Chief Executive Officer Kevin Wampler - Chief Financial Officer Gary Philbin - President and Chief Operating Officer of Family Dollar Stores
Analysts
Peter Keith - Piper Jaffray & Co. Vincent Sinisi - Morgan Stanley Joseph Feldman - Telsey Advisory Group Daniel Binder - Jefferies & Co.
Alan Rifkin - BTIG Scot Ciccarelli - RBC Capital Markets
Operator
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Randy Guiler
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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.
These are included in our most recent press release, most recent current report on Form 8-K, quarterly report on Form 10-Q and annual report on Form 10-K which are all on file with the SEC. We have no obligation to update our forward-looking statements and you should not expect us to do so.
At the end of our prepared remarks, we will open the call for your questions. Please limit your questions to one and one follow-up question if necessary.
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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.
These are included in our most recent press release, most recent current report on Form 8-K, quarterly report on Form 10-Q and annual report on Form 10-K which are all on file with the SEC. We have no obligation to update our forward-looking statements and you should not expect us to do so.
At the end of our prepared remarks, we will open the call for your questions. Please limit your questions to one and one follow-up question if necessary.
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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.
These are included in our most recent press release, most recent current report on Form 8-K, quarterly report on Form 10-Q and annual report on Form 10-K which are all on file with the SEC. We have no obligation to update our forward-looking statements and you should not expect us to do so.
At the end of our prepared remarks, we will open the call for your questions. Please limit your questions to one and one follow-up question if necessary.
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Bob Sasser
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Total sales for the second quarter increased 65.9% to $5 billion, and same-store sales on a constant currency basis increased 1.2%, driven by increases in both traffic and average ticket. Adjusted for the impact of Canadian currency fluctuations, the same-store sales increase was 1.1%.
Operating income increased 189.5% to $357.2 million, net income for the quarter was $170.2 million, and GAAP earnings per share was $0.72, which was the top end of our guidance of $0.66 to $0.72 per diluted share.
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Highlights for the Dollar Tree banner in the second quarter included a total sales increase of 8.5%. Same-store sales on a constant currency basis increased 1.2%.
I will add, this was in the face of headwinds from our re-bannered Family Dollar and Deals stores, and this was achieved through balanced increases in both traffic and average ticket.
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Highlights for the Dollar Tree banner in the second quarter included a total sales increase of 8.5%. Same-store sales on a constant currency basis increased 1.2%.
I will add, this was in the face of headwinds from our re-bannered Family Dollar and Deals stores, and this was achieved through balanced increases in both traffic and average ticket.
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Sales in our discretionary categories outpaced sales in our consumables for the quarter. And geographically, Dollar Tree banner same-store sales growth was strong as in the Midwest and in the Southwest.
The Dollar Tree business continues to be strong, consistent and growing. This represented our 34th consecutive quarter of positive same-store sales.
Our second quarter results once again validate the relevance of the Dollar Tree brand.
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Sales in our discretionary categories outpaced sales in our consumables for the quarter. And geographically, Dollar Tree banner same-store sales growth was strong as in the Midwest and in the Southwest.
The Dollar Tree business continues to be strong, consistent and growing. This represented our 34th consecutive quarter of positive same-store sales.
Our second quarter results once again validate the relevance of the Dollar Tree brand.
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We ended the quarter with our inventory clean, well balanced, seasonally relevant and stores prepared for the back-to-school season. 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 businesses through opening more stores and increasing the productivity of all of our stores.
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As a result, we ended second quarter this year with a total of 845 more Dollar Tree stores than we ended the second quarter last year. These new and newly re-bannered stores are performing well in terms of sales and improved profitability.
While this is the right decision for the long-term, and in the near-term, there was increased pressure from cannibalization on our comp stores of approximately 80 additional basis points during the second quarter. We expect this to be a headwind through the remainder of the year.
In addition to new stores, we continue to execute our strategy to improve the productivity of our existing stores. Our Drive The Business initiatives include category expansions, where 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.
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We are continuing the expansion of our frozen and refrigerated category. In the second quarter, we installed freezers and coolers in 157 additional Dollar Tree banner stores.
We currently offer frozen and refrigerated product in 4,559 stores and growing. And we are well on our way with our plan to expand frozen and refrigerated to 400 additional stores in 2016.
We continue to invest in infrastructure. Dollar Tree DC11, our new 1.5 million square foot South Carolina distribution center, was completed on time and began serving stores in the Southeast and Mid-Atlantic regions in June.
The expansion of our Stockton, California DC is adding additional capacity as we grow in our West Coast stores. And the work to co-banner the Family Dollar DC in St.
George, Utah has been completed. This DC is now servicing both banners from the same facility.
With the addition of the Family Dollar banner, we have an incredible opportunity to increase and create more shareholder value as a combined organization. I am as enthusiastic as ever about our opportunity to grow our business and to serve more customers in more ways.
We are employing a disciplined approach to building the foundation for long-term improvements and the customer experience at Family Dollar. And we remain confident in our ability to capture synergies for the combined organizations.
With a focus on managing our business in real time, our eyes are on the future 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.
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We are continuing the expansion of our frozen and refrigerated category. In the second quarter, we installed freezers and coolers in 157 additional Dollar Tree banner stores.
We currently offer frozen and refrigerated product in 4,559 stores and growing. And we are well on our way with our plan to expand frozen and refrigerated to 400 additional stores in 2016.
We continue to invest in infrastructure. Dollar Tree DC11, our new 1.5 million square foot South Carolina distribution center, was completed on time and began serving stores in the Southeast and Mid-Atlantic regions in June.
The expansion of our Stockton, California DC is adding additional capacity as we grow in our West Coast stores. And the work to co-banner the Family Dollar DC in St.
George, Utah has been completed. This DC is now servicing both banners from the same facility.
With the addition of the Family Dollar banner, we have an incredible opportunity to increase and create more shareholder value as a combined organization. I am as enthusiastic as ever about our opportunity to grow our business and to serve more customers in more ways.
We are employing a disciplined approach to building the foundation for long-term improvements and the customer experience at Family Dollar. And we remain confident in our ability to capture synergies for the combined organizations.
With a focus on managing our business in real time, our eyes are on the future 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.
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Gary Philbin
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Certainly, more work is to be done across these important customer-facing initiatives. Our feedback has been positive.
Store teams have received the tools to do better with these initiatives and have respond with great efforts to drive our in-store customer experience. For second quarter, our same-store sales for the Family Dollar banner were slightly negative and were affected by the calendar shift, which moved the August 1 of the month from second quarter last year into third quarter of this year.
Basket improved slightly against negative transactions. Our performance was balanced between discretionary and consumable, with consumables performing slightly better than our discretionary business.
Strongest sales were at the beginning of the quarter, July was slightly negative. And geographically, comp store sales were strongest in our West and Mid-Atlantic regions.
In real estate, we opened 57 new Family Dollar stores, relocated or expanded 34 Family Dollar stores for a total of 91 total projects. We re-bannered 47 Family Dollar stores to Dollar Tree, and seven others were in the process of conversion at quarter end.
We ended the quarter with 7,945 Family Dollar stores, and we continue to track on achieving our previously announced target of 200 new Family Dollar stores in 2016. At quarter end, we have total of over 14,000, 14,129, to be exact, Family Dollar and Dollar Tree stores across North America.
At Family Dollar, our focus remains around three fundamental principles: know our customer, improve our shopping experience and drive the value equation for our customer. This translates into our customer-facing messaging in there and in-store, which is our smart ways to save program.
We are pleased with the reception and traction from our customers. The value at Family Dollar is built upon this simple thought, smart ways to save, based around EDLP pricing on key items for our customer, price drop on planned items for our customers shopping list, Dollar well items on key opening price point SKUs and compare and save for our most meaningful, incredible value private-brand items.
We are also placing continued emphasis on our national brand items that are most meaningful and complemented with other value brands that emphasize the value of our assortments.
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Our team members are part of the neighborhood they serve. We are convenient and friendly.
While some of these require investments in facilities or equipment or labor, not everything does as we continue to have our field teams make progress on the basics of truck-to-floor and recovery standards. Our merchants and field teams are working hard to be first-of-the-month ready and weekend-ready, when our customers count on us the most.
Displays and recovery around these important days are part of our planning and execution. We know our customers measure us against their view of store cleanliness, product assortment, customer service, speed of checkout.
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Our focus is on what our customer needs and gives us credit for, identifying a lot of ways important productivity enhancements that allow us to reduce cost within our systems and process, then reinvesting some of these savings again, where our customers will see benefit. Test and learn is part of the process and points us to the best areas to invest.
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Our focus is on what our customer needs and gives us credit for, identifying a lot of ways important productivity enhancements that allow us to reduce cost within our systems and process, then reinvesting some of these savings again, where our customers will see benefit. Test and learn is part of the process and points us to the best areas to invest.
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Now I will turn the call over to Kevin to provide more detail on our second quarter financial performance and our updated outlook for Q3 and full-year 2016.
Kevin Wampler
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Total sales for the second quarter grew 65.9% to $5 billion, which includes our fourth full quarter of Family Dollar sales. Dollar Tree segment total sales increased 8.5% to $2.39 billion, while Family Dollar segment total sales decreased 4.5% to $2.61 billion.
Year-over-year sales comparisons for Family Dollar were impacted by the removal of 268 stores, which were re-bannered as Dollar Tree stores and 325 stores, which were divested as required by the FTC. The total reduction in Family Dollar store count as a result of re-bannering and divestiture is 593.
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As Bob mentioned, the incremental cannibalization was approximately 80 basis points for Q2. Adjusted for the impact of Canadian currency fluctuations, same-store sales grew 1.1%.
All acquired Family Dollar stores and newly re-bannered Family Dollar and Deals stores are considered new stores and are excluded from our same-store sales calculation.
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On a GAAP basis, gross profit margin for the Family Dollar segment increased $588.4 million. The increased amount was due to the nine additional weeks in the second quarter of 2016 when compared to the second quarter of 2015.
Gross profit margin for the Family Dollar segment was 26.6% during the second quarter compared with 22.9% in the comparable prior year period.
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On a GAAP basis, gross profit margin for the Family Dollar segment increased $588.4 million. The increased amount was due to the nine additional weeks in the second quarter of 2016 when compared to the second quarter of 2015.
Gross profit margin for the Family Dollar segment was 26.6% during the second quarter compared with 22.9% in the comparable prior year period.
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The year-over-year decrease for the quarter was driven primarily by lower payroll costs as we implemented our shared-service model, lower incentive cost based on performance and reduced legal expenses. These were partially offset by higher store hourly payroll costs and store operating costs related to HVAC repair costs.
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The year-over-year decrease for the quarter was driven primarily by lower payroll costs as we implemented our shared-service model, lower incentive cost based on performance and reduced legal expenses. These were partially offset by higher store hourly payroll costs and store operating costs related to HVAC repair costs.
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The year-over-year decrease for the quarter was driven primarily by lower payroll costs as we implemented our shared-service model, lower incentive cost based on performance and reduced legal expenses. These were partially offset by higher store hourly payroll costs and store operating costs related to HVAC repair costs.
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The year-over-year decrease for the quarter was driven primarily by lower payroll costs as we implemented our shared-service model, lower incentive cost based on performance and reduced legal expenses. These were partially offset by higher store hourly payroll costs and store operating costs related to HVAC repair costs.
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Excluding these costs, SG&A expense increased 10 basis points as a percent of sales to 21.8% from 21.7% in the prior year. The increase was primarily driven by increased store payroll, incentive compensation, advertising costs and repairs, partially offset by lower business insurance costs and lower utility costs.
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On a GAAP basis, operating income for the Family Dollar segment increased $189.7 million to 3.6%. Excluding the $1.9 million of inventory step-up amortization, $18.7 million for favorable lease rights amortization and the $5 million in additional depreciation for useful life and fixed asset revaluation, operating profit margin for Family Dollar in the quarter was 4.6%.
In the prior year, the Family Dollar segment incurred an operating loss, primarily as a result of markdowns related to SKU rationalization and planned liquidations of non-go-forward merchandise.
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Our outstanding debt is approximately $7.3 billion. Inventory for the Dollar Tree segment at quarter end was 15.1% greater than at the same time last year, while selling square footage increased to 10.4%.
Inventory for selling square foot increased 4.3%. We believe that current inventory levels are appropriate to support scheduled new store openings and our sales initiatives for the third quarter.
Inventory for the Family Dollar segment at quarter end decreased 1.5% from the same period last year and increased 2.2% on a selling square foot basis. We are pleased with the progress we are seeing on in-stock levels on key items.
We are continuing to review merchandise assortments and believe our current inventory levels are appropriate for the third quarter. Capital expenditures were $180 million in the second quarter of 2016 versus $100.1 million in the second quarter last year.
For fiscal 2016, we are planning for consolidated capital expenditures to range from $650 million to $670 million. Capital expenditures will be focused on new stores and remodels, including few development stores, our re-banner initiatives, the addition of frozen and refrigerated capability to approximately 400 Dollar Tree stores, IT system enhancements and integration projects and our distribution center projects.
Depreciation and amortization totaled $161.9 million for the second quarter. This includes purchase accounting-related costs of $18.7 million for the favorable lease rights amortization and $5 million in depreciation for useful life and asset revaluation.
Depreciation expense was $89.5 million in the second quarter of 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 are included in our guidance. First, it includes $30 million all in the first half of fiscal 2016 of depreciation above the historical run rate for Family Dollar as a result of harmonizing the depreciable lives accounting policies of the two companies and the increase in the value of the assets based on the purchase price allocation.
Secondly, it includes $18.4 million for Q3 and $74 million for fiscal 2016 for the amortization of favorable lease rights for the purchase accounting valuation of Family Dollar leases. Our updated outlook for fiscal 2016 includes the following assumptions.
Our same-store sales calculation excludes Family Dollar stores and excludes stores that are re-bannered. The acquired stores will be included in our same-store sales calculations as of the beginning of our fourth quarter of 2016.
In 2016, the last two days of October, our biggest Halloween sales days, shift into our fourth quarter. We reflected this shift accordingly in our sales guidance.
There are two additional days between Thanksgiving and Christmas in 2016. We will continue to experience a higher than normal degree of cannibalization to Dollar Tree comps as part of our re-banner efforts.
This cannibalization expectation was planned and factored into both our re-banner strategy analysis and our outlook for same-store sales. We have budgeted lower diesel fuel and import freight costs than a year ago.
Interest expense will be approximately $88 million per quarter in Q3 and Q4. We are currently reviewing opportunities to refinance our current debt structure given market conditions in the debt capital markets.
Our guidance does not include any effect of potential reduced interest expense or non-cash charges for deferred financing fees to be written off if a transaction is consummated. Any material changes would be communicated via an 8-K upon closing of a transaction.
Our updated full-year guidance now includes an estimated impact of $0.03 to $0.04 per share related to the FLSA change and over time regulations, which takes effect in December. Our guidance incorporates the costs and synergies from our corporate restructuring related to merger integration that was announced on August 4.
We cannot predict the future currency fluctuations. We have not adjusted our guidance for changes in currency rates.
Our guidance also assumes a tax rate of 29.9% for the third quarter and 33.7% for fiscal 2016. The lower rate in Q3 is a result of the state of North Carolina lowering its corporate income tax rate from 4% to 3%, beginning January 1, 2017.
The Company estimates this change will decrease its deferred tax liability and decrease its tax expense. The Company expects to recognize a one-time tax benefit of approximately $20 million or $0.09 per share in Q3 of fiscal 2016.
Weighted average diluted share counts are assumed to be 236.4 million shares for Q3 and for the full-year. For the third quarter, we are forecasting total sales to range from $5.02 billion to $5.10 billion and diluted earnings per share on a GAAP basis in the range of $0.76 to $0.82, which includes the expected one-time tax benefit of $0.09 per share.
These estimates are based on a low single-digit same-store sales increase and year-over-year square footage growth of 2.5%.
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Bob Sasser
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The business has stabilized and is showing signs of long-term fundamental improvements. We have successfully launched and are testing the results of our first co-bannered DC in St.
George, Utah, and we continue to make progress on our systems integration and development of our shared-services model for support functions. We have great confidence in our ability to deliver at least $300 million in annual run rate synergies by the end of year three and I believe we can exceed these expectations.
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The business has stabilized and is showing signs of long-term fundamental improvements. We have successfully launched and are testing the results of our first co-bannered DC in St.
George, Utah, and we continue to make progress on our systems integration and development of our shared-services model for support functions. We have great confidence in our ability to deliver at least $300 million in annual run rate synergies by the end of year three and I believe we can exceed these expectations.
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The business has stabilized and is showing signs of long-term fundamental improvements. We have successfully launched and are testing the results of our first co-bannered DC in St.
George, Utah, and we continue to make progress on our systems integration and development of our shared-services model for support functions. We have great confidence in our ability to deliver at least $300 million in annual run rate synergies by the end of year three and I believe we can exceed these expectations.
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For 34 consecutive quarters, the 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 the state of the economy.
While our price point remains $1, our operating margin continues to grow and lead the discount sector. Our history of performance continues in the second quarter, Dollar Tree banner sales increased 8.5%, same-store sales increased 1.2% and operating margin improved to 11%.
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Operator, we are now ready for questions.
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Operator, we are now ready for questions.
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Operator, we are now ready for questions.
Operator
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Peter Keith
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Bob Sasser
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Gary Philbin
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Peter Keith
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Kevin Wampler
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Peter Keith
Okay. Thanks a lot.
Good luck for the rest of the year.
Kevin Wampler
Thank you.
Operator
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Vincent Sinisi
Hey, great thanks very much for taking my question. Good morning guys.
Just to follow up on the Dollar Tree kind of comp reporting structure once 4Q comes around. Should we expect one consolidated number?
And then what level of detail between the segments do you expect to give going forward?
Kevin Wampler
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Vincent Sinisi
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Bob Sasser
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Vincent Sinisi
Okay, great. Thanks very much Bob.
Good luck going forward.
Bob Sasser
Thank you.
Operator
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Joseph Feldman
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Bob Sasser
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Joseph Feldman
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Gary Philbin
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Joseph Feldman
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Bob Sasser
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Joseph Feldman
Great. Thanks.
Good luck for this quarter guys.
Bob Sasser
Thank you very much.
Operator
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Daniel Binder
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Bob Sasser
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Gary Philbin
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Daniel Binder
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Gary Philbin
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Daniel Binder
Great. Thank you.
Operator
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Alan Rifkin
Thank you very much. Bob, as a follow-up to the $300 million synergy goal that you expect to exceed, you had, in earlier calls, talked about year one synergies which we are now past being $75 million.
Can you maybe provide some commentary relative to the $75 million as to what you realized in the first full year?
Bob Sasser
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Alan Rifkin
Okay. Fair enough.
You also basically raised the midpoint of your earnings guidance by $0.05, $0.055 with the new guidance today, including the $0.03 to $0.04 impact from the overtime rule going into effect December 1. You did this at the same time that you lowered revenues and basically kept the comps consistent at low single digits.
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Kevin Wampler
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Alan Rifkin
Thank you, Kevin.
Operator
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Scot Ciccarelli
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Kevin Wampler
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Gary Philbin
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Scot Ciccarelli
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Gary Philbin
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Scot Ciccarelli
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Gary Philbin
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Scot Ciccarelli
Okay. Thanks guys.
Gary Philbin
You bet. End of Q&A
Operator
At this time, I like to turn the conference back over to Mr. Guiler for any additional or closing remarks.
Randy Guiler
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Operator
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