Mar 1, 2017
Executives
Randy Guiler - Vice President Investor Relations Bob Sasser - Chief Executive Officer Kevin Wampler - Chief Financial Officer Gary Philbin - Enterprise President
Analysts
Matthew Boss - JPMorgan Karen Short - Barclays Scot Ciccarelli - RBC Capital Markets Brad Thomas - KeyBanc Capital Market Paul Trussell - Deutsche Bank Dan Binder - Jefferies Dan Wewer - Raymond James
Operator
Good day and welcome to the Dollar Tree Fourth Quarter Earnings Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Randy Guiler, Vice President Investor Relations. Please go ahead, sir.
Randy Guiler
Thank you, Melanie. Good morning and welcome to our conference call to discuss Dollar Tree's performance for the fourth quarter and fiscal year 2016.
Participating on today's call will be our CEO, Bob Sasser; our CFO, Kevin Wampler, and our Enterprise President, Gary Philbin. Before we begin, I would like to remind everyone that various remarks that we will make about future expectations, plans and prospects for the Company constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors. Included in our most recent press release, most recent current report on Form 8-K, quarterly report on Form 10-Q and annual report on Form 10-K which are all on file with the SEC.
We have no obligation to update our forward-looking statements and you should not expect us to do so. At the end of our prepared remarks, we will open the call for your questions.
Please limit your questions to one and one follow-up question if necessary. Now I will turn the call over to Bob Sasser, Dollar Tree’s Chief Executive Officer.
Bob Sasser
Thanks, Randy and good morning, everyone. As you know this morning, we announced our results for the fourth quarter and full year fiscal 2016.
Enterprise total sales for the fourth quarter increased 5% to $5.64 billion and same-store sales, which now includes our Family Dollar Segment, on a constant currency basis increased 1.2%. Adjusted for the impact of Canadian currency fluctuations, the same-store sales increase was 1.3%.
By segment, same-store sales for the Dollar Tree banner increased 2.3% or 2.4% when adjusted for Canadian currency fluctuations. And for the Family Dollar banner same-store sales increased 0.2%.
Our gross margin rate improved 130 basis points to 32.1%. We leveraged our total SG&A expense by 30 basis points.
Operating income increased 24.9% to $586.5 billion and our year-over-year operating margin for the quarter improved from 8.8% to 10.4%. Net income for the quarter increased 40.5% to $321.8 million and our earnings per share were $1.36.
This represents a 40.2% improvement from the fourth quarter a year ago and exceeded the high end of our guidance range by $0.03 per share. This was a very solid quarter across both banners.
Total sales were near the mid-point of our range of guidance. Same-store sales were positive in both Dollar Tree and in Family Dollar.
Gross margin rate and the operating margin rates improved and SG&A expenses across both banners were well managed. Operating margin improved 160 basis points to 10.4% for the quarter and importantly our EPS exceeded the top-end of our range of guidance.
We’re pleased with our progress on the integration of our Family Dollar business and we remain on track to deliver at least $300 million in run rate synergies by the end of the third year post acquisition. There’s still much more to be done and we continue to believe we will ultimately surpass our three year target.
Our strategy remains unchanged, to deliver great values and convenience to our shoppers every day. With the combination of our complimentary brands, Dollar Tree and Family Dollar, we have on parallel of opportunity and value retail to serve more customers in our markets.
We believe we are in the most attractive sector in retail. Shoppers today are increasingly focused on value and convenience and that’s exactly what Dollar Tree and Family Dollar stores provide, value and convenience.
Looking forward, our banners are positioned for increased relevance to our customers, sustain growth and improve profitability. We have multiple opportunities to continue growing and improve our business.
We’re opening more stores. In fiscal 2016, we opened 584 new stores.
And in fiscal 2017, our plans include opening 650 new stores. Additionally, we’re keenly focused on increasing the productivity of all of our stores.
We see continued opportunity to increase sales, improve gross margin and better manage the cost structure within each of our banners through our continued focus on the customer, drive the business initiatives, timely category reviews, new items, category expansions, shared services and just running great stores, open exciting stores. Dollar Tree Canada continues to be a key brand in our portfolio and an important component of our growth strategy.
I’m extremely proud and pleased with the progress made by our merchant and store teams in Canada. Their continued efforts to serve the Canadian customer are delivering higher store productivity each year.
Comp sales momentum continued into fourth quarter, driven by increases in both average ticket and customer count. Leveraging the buying power of Dollar Tree, our merchants continue to source higher value product and our customers are finding broader, more exciting assortments and better values in Dollar Tree Canada stores.
Our goal is to be recognized by customers as the leading retailer in Canada at the single price point of CAN1.25, just as we’re in the U.S. at the $1 price point.
We now operate 226 stores in Canada and believe we have an opportunity for 1000 stores over time. In addition to Dollar Tree, Family Dollar and Dollar Tree Canada, our online business at Dollar Tree Direct is growing in size, performance and importance.
Dollar Tree Direct provides an opportunity to broaden our customer base, drive incremental sales, expand brand awareness and attract more customers into our stores. While Dollar Tree Direct is a relatively small component when compared to our overall business, I continue to be very pleased with its year-over-year growth.
As retailers in the digital age, we plan to engage with our customers wherever and however they prefer. We strive to run world class stores, deploy world class digital mediums and engage with our customers via conventional and digital marketing channels such as email, Facebook, Pinterest, [indiscernible], Twitter and much more.
Where the customers prefer to contact Dollar Tree Direct via their phones, their pads, their laptops or their desktops, we’re ready and able to connect with them. We continue to very pleased with the growth of both sales and visitors to our Dollar Tree Direct business.
Please check this out at dollartree.com. Now, I'll turn the call over to Gary to provide more detail on our performance and our priorities.
Gary Philbin
Thank you, Bob, and good morning everyone. As Bob commented, we were pleased with our performance in the fourth quarter, but we know we're still capable of doing better.
We operate in an environment of continuous improvement and drive the key business initiatives that focus on delivering better in-store shopping experience, top-line sales growth, margin enhancements, and cost reduction. For the quarter, our enterprise same-store sales increased by 1.2%.
Highlights for the Dollar Tree banner include total sales in Q4 increased 7.9% to $2.9 billion. Same-store sales on a constant currency basis increased 2.3%.
This was achieved through increases in both traffic and average ticket. Gross profit margin improved 110 basis points over Q4 last year and fourth quarter operating margin was 16.4%, an improvement of 140 basis points over last year's 15%.
And Dollar Tree’s operating margin for the full-year in 2016 grew 130 basis points to 12.9%, a new record for Dollar Tree. To share some of the highlights on the quarter, our top performing categories for the Dollar Tree banner include candy, seasonal, party supplies, snacks and beverages, toys, and household products.
Sales performance was balanced between both our discretionary and consumables. We delivered positive same-store sales each month throughout the quarter.
November, which benefited from the Halloween shift, was our strongest comp month. And geographically Dollar Tree same-store sales growth for the quarter was very balanced as each of our operating zones delivered positive comps that exceeded 1%.
Dollar Tree business continues to be strong, consistent, and growing. This represented our 36th consecutive quarter of positive same-store sales, full-year operating margin historically one of our highest.
Our fourth quarter results validate the relevance of the Dollar Tree brand. Customers continue to shop for value and convenience.
Highlights for the Family Dollar banner in the fourth quarter included our total sales increase of 2.2%, our same-store sales increase of 20 bps. Average ticket was up 30 bps and traffic was down slightly.
Gross profit margin improved 110 basis points over last year and operating margin was 4%, an improvement of 160 basis points over the prior year quarter. Our Family Dollar highlights for the quarter, our top performing categories for the Family Dollar included electronics, snacks and beverage, candy, men's apparel, and cough and cold supplies.
Our comp performance was driven by consumables. We delivered positive same-store sales in both November and January.
November, of course, which benefited from the Halloween shift was our strongest comp month. And geographically Family Dollar same-store sales growth for the quarter was relatively balanced with our West and Northeast operating zones being the strongest.
We are now 18 months into our integration and we continue to make progress at Family Dollar around the key foundational elements that will drive our performance. Store table stakes focus on merchandising value and consolidation of shared services.
Our efforts continued to be around customer facing initiatives that our shoppers continue to give us credit for, as we work to improve these across our base of 8000 stores. Our customers are seeing cleaner, better merchandise stores.
They have more compelling end caps with product they need for everyday basics and holiday wants. While we have more to do here, we are on the right track with our continued investment in the basics of our Family Dollar banner.
These customer facing programs to drive and share values throughout the store continue to build momentum across our smart way to save marketing programs. Our customers continue to respond to the value and savings across all of our foundations on delivering value for our Family Dollar customers.
The smart way to save the strategy connects the values in our ad to the merchandising in our stores. EDLP pricing on our everyday value, sale items that reflect the most meaningful value on key items are Dollar well items that drives the surprise and opening price points throughout our stores, compare and save to shut down our excellent value of our private brands, price drop, great value on the items, our customers buy most often and most recently smart coupons, the easy way to find additional savings.
Our customers are continuing to respond and embrace our smart coupons with sign-ups exceeding our projections since our Labor Day kickoff. For our regular shoppers, this program provides a no hassle shopping experience to find national and Family Dollar exclusive offers.
For Family Dollar, it's a great way for us and our vendor partners to reach a demographic that is uniquely served by Family Dollar. It enhances the delivery of our smart ways to save messaging.
Another one of our foundational parts of our strategy for success is our focus on table stakes. At a high level, this includes our improved store standards and conditions, neat, clean, full, and recovered, merchandising relevance and energy, finding what I need at Family Dollar at a value I recognize, and customer engagement, it's our energy around Family Dollar friendly.
Our customers count on us all month long, but the first 10 days of the month are critical in our efforts to have our in stock on shelf recovered and end caps with compelling offers. Our focus here revolves around our efforts to have improved on shelf in stocks along with our operational teams improving our truck to shelf process back to the basics.
The convenience of our stores combined with our focus on improvements across the customer facing initiatives is foundational for an improved customer experience at Family Dollar. While we have more to do, our team at Family Dollar is motivated and energized to do the best to delivering value to our customers.
They are unique in many ways and often under-served. Our stores serve a customer that counts on us and responds and we deliver value, customer service in a Family Dollar shopping experience that we're all proud of in the neighborhoods we serve.
Now, looking at real estate in the fourth quarter, we opened a total of 104 new stores, 47 Dollar Trees and 57 Family Dollars. We relocated or expanded 27 stores, 16 Dollar Trees, 21 Family Dollars and we re-bannered 8 additional Family Dollars to Dollar Tree for a total of 139 projects during the quarter.
We also added freezers and coolers into 86 Dollar Tree stores during the fourth quarter, bringing our total of Dollar Tree stores of freezers and coolers to 4788 stores. During the quarter, we closed 55 stores, 15 Dollar Trees and 40 Family Dollars.
And we ended the fiscal year with over 14,000 stores, 14,334, 6360 Dollar Trees and 7974 Family Dollar stores. For fiscal ‘16, we opened 359 new Dollar Tree stores, 225 Family Dollar stores for a total of 584, which exceeded our target of 550 new stores during the year.
For 2017, our real estate plans include 650 new stores, 350 Dollar Tree and 300 Family Dollar stores, renovations at 250 Family Dollar stores. Cooler and freezer expansions in 300 Family Dollar stores and adding freezers and coolers to 400 new and existing Dollar Tree stores.
As I mentioned, we are pleased with our progress, but there is much work in opportunities that lies ahead of us. I will now turn the call over to Kevin to provide more detail on Q4 performance and our initial outlook on Q1 in fiscal ‘17.
Kevin?
Kevin Wampler
Thank you, Gary, and good morning. Total sales for the fourth quarter grew 5% to $5.64 billion.
This was at the midpoint of the guidance range of $5.59 billion to $5.69 billion. Dollar Tree segment total sales increased 7.9% to $2.9 billion.
And Family Dollar segment total sales increased 2.2% to $2.74 billion. Beginning in our fourth quarter, the acquired Family Dollar stores are now included in our overall same-store sales.
Enterprise same-store sales on a constant currency basis increased 1.2%. Adjusted for the impact of the Canadian currency fluctuations, same store sales grew 1.3%.
On a segment basis, same store sales increases were 2.3% for the Dollar Tree banner and 0.2% for the Family Dollar banner. As expected, we experienced incremental cannibalization from Family Dollar and deal stores that have been converted to Dollar Tree stores.
We estimate the incremental cannibalization impact to the Dollar Tree banner comp to be approximately 50 basis points for the quarter. Gross profit for the combined organization increased 9.3% to $1.81 billion for the fourth quarter of 2016 compared to the prior year’s quarter.
As a percent of sales, gross profit margin improved 130 basis points to 32.1% versus 30.8% in the prior year’s quarter. Gross profit margin for the Dollar Tree segment was 37.5% during the fourth quarter, a 110 basis point improvement compared with the prior year’s fourth quarter.
Factors impacting the segment gross margin performance during the quarter included lower merchandise cost due to higher initial mark-on and favorable freight costs and lower markdowns due to the deals conversions in the prior year. These were partially offset by higher distribution and occupancy costs as a percent of net sales.
Gross profit for the Family Dollar segment increased 6.6% to $718.5 million. Gross profit margin for the segment was 26.3% during the fourth quarter, compared with 25.2% in the comparable prior year period.
Excluding the inventory step-up amortization of $15.9 million in the prior year’s quarter, gross profit margin was 25.8% for Q4 of 2015. Improvement was due to lower merchandise, freight, and shrinks costs, partially offset by higher markdown expense and increased distribution and occupancy costs.
Consolidated selling, general, and administrative expenses in the quarter improved to 21.7% from 22% in the same quarter last year as a percent of net sales. Q4 SG&A expense for the Dollar Tree segment as a percent of sales improved 30 basis points to 21.1% from 21.4% in the prior year’s quarter.
Decreases in payroll costs, legal fees, depreciation and advertising were partially offset by increases in store wages and retirement plan contributions. SG&A expense for the Family Dollar segment was $608.1 million and as a percent of sales was 22.2% compared to 22.7% in the prior year’s quarter.
The improvement was driven primarily by lower payroll costs including incentive comp, stock comp expense, worker's comp insurance and health insurance costs, as well as lower legal and depreciation expense. These decreases were partially offset by higher store hourly payroll, advertising, and repair and maintenance costs.
Operating income for the enterprise increased $586.5 million compared with $469.7 million in the same period last year. Operating margin increased to 10.4% for the quarter from 8.8% in last year's fourth quarter.
Operating income margin for the Dollar Tree segment improved 140 basis points to 16.4% when compared to the prior year and the operating income for Family Dollar segment increased $45.1 million to $110.4 million, a 160 basis point improvement as a percent of sales when compared to the prior year’s quarter. Non-operating expenses for the quarter totaled $88.8 million, which was comprised primarily of net interest expense and $11.7 million of acceleration of amortizable non-cash deferred financing costs related to our debt prepayment made in January.
Our effective tax rate for the fourth quarter was 35.3% compared to 35% in the prior year’s quarter. For the fourth quarter, the company had a net income of $321.8 million or $1.36 per diluted share compared to reported net income of $229 million or $0.97 per diluted share in the prior year’s quarter.
The current year includes $0.03 of expense for the write-off of amortizable non-cash deferred financing costs incurred during the quarter as previously noted. Looking at the balance sheet and statement of cash flow, our combined cash and cash equivalents at year-end totaled $866.4 million compared to $736.1 million at the end of 2015.
Our outstanding debt is approximately $6.3 billion, a decrease of $1 billion from the prior year end. Inventory for the Dollar Tree segment at quarter end was 4.6% greater than at the same time last year, while selling square footage increased 6.6%.
Inventory for selling square foot decreased 2%. We believe the current inventory levels are appropriate to support scheduled new store openings and our sales initiatives for the first quarter.
Inventories for the Family Dollar segment at quarter end decreased 4.6% from the same period last year and decreased 6% on a selling square foot basis. We're pleased with the progress we're seeing on in-stock levels on key items.
We are continuing to review merchandise assortments and believe our current inventory levels are appropriate for the first quarter. Capital expenditures were $113.2 million in the fourth quarter of 2016 versus $144 million in the fourth quarter of last year.
For fiscal 2017, we're planning for consolidated capital expenditures to range from $760 million to $780 million. Capital expenditures will be focused on new stores and remodels, including few development stores, our plans include renovating 250 Family Dollar stores in 2017, the addition of frozen and refrigerated capability to a total of 400 new and existing Dollar Tree stores, the expansion of frozen and refrigerated for 300 Family Dollar stores, IT system enhancements and integration projects, the start of construction of a new Dollar Tree banner distribution center, and to continue to build out of a new office building for the support centers in Chesapeake.
Depreciation and amortization totaled $155.5 million for the fourth quarter. This includes purchase accounting related costs of $17.9 million for favorable lease rights amortization.
Depreciation and amortization expense was $174.9 million in the fourth quarter last year. For fiscal 2017, we expect consolidated depreciation and amortization to range from $610 million to $630 million.
This includes $66 million for fiscal 2017 for the amortization of favorable lease rights for the purchase accounting valuation of Family Dollar leases. Before I speak to our assumptions included in our 2017 guidance, I want to outline the one-time or unique items that impacted our 2016 earnings by quarter.
In Q1 2016 we had a one-time $0.09 per share benefit in our tax rate related to state tax planning. In Q3 2016 we had a one-time $0.09 per share benefit in our tax rate related to a reduction in state tax rate, which decreased the deferred tax liability related to our trade name intangible assets.
Also in Q3 2016 we incurred $0.09 per share in expenses related to our debt refinancing and lastly in Q4 of 2016, we incurred $0.03 per share in expenses related to our debt repayments. And outlook for fiscal 2017 includes the following assumptions.
Fiscal 2017 includes a 53rd week. The extra week in the fourth quarter is expected to add $400 million to $430 million into sales and $0.19 to $0.22 to earnings per diluted share, both of which are included in our guidance.
Over the next two quarters, we will continue to experience a higher than normal degree of cannibalization to Dollar Tree comps from our re-banner efforts. We expect continued pressure on store payroll based on states increasing minimum wages and general average hourly rate increases.
We have budgeted higher import freight costs in a year ago starting in Q2 and higher diesel cost for the year. Net interest expense will be approximately $75 million per quarter in Q1 through 3 and approximately $81 million in Q4 due to the extra week.
Our guidance does not include any impact related to FLSA overtime regulation changes, which were postponed last November. Our guidance does not include a share repurchase as for 2017.
We cannot predict future currency fluctuations. We have not adjusted our guidance for changes in currency rates.
Our guidance assumes a tax rate of 37.2% for the first quarter and 37% for fiscal 2017. Weighted average diluted share counts are assumed to be 237.5 million shares for Q1 and 237.7 million for the full year.
For the first quarter, we are forecasting total sales to range from $5.26 billion to $5.35 billion and diluted earnings share in the range of $0.91 to $0.98. This compares to a reported $0.98 per diluted share from the prior year’s first quarter or $0.89 per diluted share when adjusted for the one-time tax rate benefit of $0.09 per share related to state tax planning.
These estimates are based on a flat to low single digit same-store sales increase and year-over-year square footage growth of 3.9%. For fiscal 2017, we are forecasting total sales to range between $21.94 billion and $22.33 billion and diluted earnings per share in the range of $4.20 to $4.56.
These estimates are based on a flat to low single digit same-store sales increase and 3.9% square footage growth and include the benefit of the 53rd week occurring in Q4 of fiscal 2017 as previously noted. I'll now turn the call back over to Bob.
Bob Sasser
Thank you, Kevin. Again, I am extremely pleased with our solid performance for the fourth quarter and I'm proud of our combined Family Dollar and Dollar Tree teams.
We continue to make meaningful progress with our integration plans. We believe that we are well positioned in the most attractive sector of retail to deliver continued growth and increased value for our long-term shareholders.
Dollar Tree is now a diversified combination of a 6000 store chain and an 8000 store chain, each with its unique ability to effectively serve more customers through all types of markets. With a combination of these two great brands, we have great flexibility in how we choose to grow while expanding our opportunity to grow.
We will continue to focus on providing greater values to our customers, while delivering superior returns to our long-term shareholders. Recently I joined our combined merchandise teams on their post-holiday overseas buying trip.
I was very pleased and encouraged by the results from this trip as we continue to develop business relationships, identify and secure tremendous values, improve our supply chain and quality control, while meeting our targeted margin thresholds. We have developed valuable experience and expertise over the years and we are leveraging this for the benefit of our customers across all banners.
In recent months, there has been an inordinate focus on the proposed border adjustment tax. We, like most other retailers, feel that the border tax would result in a significant burden to the consumer both through reduced choices and higher prices.
We're working with the National Retail Federation, Retail Industry Leaders Association, and the Americans for Affordable Products Group to express our concerns. At this early stage we cannot answer questions regarding potential impacts until we know what if anything is passed.
But I do know that this for 30 years Dollar Tree has demonstrated its ability to adapt and react in managing our business effectively. Over the past 30 years we have seen inflation in all-cost including product, labor, transportation, and real estate and we've been able to successfully maintain our dollar price point, deliver relatively consistent gross margins, and still provide tremendous values to our shoppers.
As always, we will continue to employ a disciplined approach to driving key strategic initiatives to the combined enterprise to improve communication, analysis collaboration and incentives. We are confident that continuing to place our emphasis in these areas can materially enhance operating performance of the Family Dollar brand through improvements in sales, margins, expense control, and greater customer satisfaction.
The Dollar Tree business model continues to grow and improve. It’s powerful, flexible, and more relevant than ever, providing extreme value to customers while recording record levels of sales and earnings.
While after 30 years our price point at Dollar Tree stores remains $1, our operating margin continues to grow and leads the discount sector. For the full year 2016, our Dollar Tree operating margin improved 130 basis points to 12.9%.
Our model has been tested by time and validated by history. For 36 consecutive quarters we have delivered positive same store sales increases.
Through good times and difficult times and all retail cycles, consumers are looking for value no matter the state of the economy. In the fourth quarter, total sales increased 5%.
Enterprise wide same store sales increased 1.2%, and operating margin improved from 8.8% a year ago to 10.4%. It all starts with our associates.
Our merchandise teams and our field management and leadership teams are talented, experienced, energized, and incredibly motivated. It's a great time to be Dollar Tree.
Operator, we are now ready for questions.
Operator
Thank you. [Operator Instructions] We’ll go first to Matthew Boss with JPMorgan.
Matthew Boss
Thanks. So, Bob, on same-store sales, what's the mindset around including flat at the low end of the flat to low single digit guide for this year?
I guess any change in the competitive landscape or any change in the way that you view the Family Dollar productivity opportunity?
Bob Sasser
Matt, we're extremely excited about the opportunity. Productivity increases in Family Dollar and in Dollar Tree.
But as we sit here first quarter looking out across the whole year, we have great confidence in our ability to implement and to execute our initiatives. We have great confidence in our models and our initiatives.
Our value retail model is as good as it can be. I believe we're positioned exactly where we need to be as we go into 2017.
So, it's not a lack of confidence. It’s more, just it's first quarter and we're looking out across the year.
We're looking at our business. We're looking at some uncertainty out in the economic environment and some bits and starts.
So, as a result we put all that together. We put what we know on page and then we put uncertainty and that's how we come up with our guidance.
We want to always be fair and measured and make sure that we give you the best information we can possibly give you. As always we intend to continue to improve and exceed expectations where possible.
Matthew Boss
It's great. And then just a follow-up at the core Dollar Tree, so roughly 90 basis points of operating margin expansion this year almost 13% today, how would you rank the margin opportunity from here at the core Dollar Tree banner?
Bob Sasser
Well, there is still plenty of opportunity. There are some headwinds that we have in our ocean freight and some of the things that Kevin called out with diesel fuel higher now, but we've always been able to - as long as we can see it coming, we've always been able to manage around that and always drive our operating margin.
As you know, I've always said we're in charge of our gross margin. At Dollar Tree we go to market with two things in mind and our buyers are looking for the best value for the Dollar, for the customers at a margin we're willing to accept.
So, we decide sometimes that we take opportunities. We find the market and we use those to drive sales.
Sometimes we take it into our margin, but we're always in control of what we're doing. So, we feel really good about our Dollar Tree margin.
And again this is our 30th anniversary. It's 30 years, everything is a dollar, every increasing improvements in the business, still hitting some high watermarks at 12.9% operating margin and I think we can continue them.
Matthew Boss
That’s great, best of luck guys.
Operator
We’ll go next to Karen Short with Barclays.
Karen Short
Hi. Thanks for taking my question.
I wonder if you could give an update on kind of where you are in synergies today and cost incurred to the synergies and then just an update on whether 159 is still the right run rate to think about for 2017?
Bob Sasser
Yeah, Karen, I think as we've said from day one, our expectation is to be able to achieve 300 million and hopefully exceed that at the end of the day and as we kind of broke that out, we kind of broke it out as 75 million the first year, 225 by the end of the second year and 300 million by the end of the third year. We think we’re right where we need to be on track maybe just a little bit ahead.
So, I think that feels pretty good. The one-time cost to achieve, again we spoke a little bit to that last quarter and again when we originally talked to that, we talked about it being about half of that being operational expenses and half of it being capital expenses.
I think at this point it's probably a little bit more on the CapEx side again, because of the re-banners we've done, the 300 re-banners, as well as the 200 deals re-banners, the system integration that's going on, the work around co-bannering, the Utah distribution center. On the OpEx side, it's been a little less, but there has been some consulting professional fees and some various other costs there.
But all of the other things we feel like we're well on target and we’re going to be able to risk [ph] and work very hard to exceed that $300 million.
Karen Short
Great, thanks. And just a follow-up on the first quarter guidance, I guess the earnings guidance is a little lighter than consensus.
Is there anything just to point to there?
Bob Sasser
Yeah, I don't know if there is anything specifically to point to. I think as we look at it, a couple of things, one, Q1 from the diesel cost perspective, it is the biggest change quarter-to-quarter.
So, the diesel cost is about $0.02 of headwind in basically Q1. So, that's bigger than it is in any other one.
And again I do want to make sure that people are comparing it to the adjusted number of last year of $0.89 as opposed to what was reported, because of the tax benefit of a year ago. But that's probably the biggest thing I would point out as diesel cost and otherwise I think, we feel pretty good about the number we have been able to put out there.
Karen Short
Great, thanks.
Operator
We will go next to Scot Ciccarelli with RBC Capital Markets.
Scot Ciccarelli
Good morning guys. You broke into positive comp territory for Family Dollar this quarter and as you continue to work on improving the store format, the up taking the merchandise et cetera.
Is there anything we should keep in mind as to why that banner may or comp negative at some point during the course of the year? Or do you expect that to be kind of stable going forward?
Gary Philbin
Scot, this is Gary, good morning. The way I think about the business is got slight positive comp in Q4 and that was with of course there was positive growth in November and January and we made our plans for the year.
The foundational things that we are putting in place, running better stores and that revolves around just having our products and stock, cleaner, fuller, the retail basic that we have been talking about there is a thing that I think started to deliver year-over-year better comps for us. Some of the strategic things that we mentioned in the call, core expansion, we are starting a renovation firm, and those are things that will over time shift our fleet of stores from how they operate today to something different in future and maybe the third piece is we are really around the merchandising and the assortments.
So as we think about what a Family Dollar customer needs and wants. Those are the longer term enhancements you will see as we go through fine cycles both on imports and in our domestic product.
So I take a look at the year and we are retailer, we always bullish, those who are doing the foundational things and help us stay more consistent with our progress on top line sales and then continue to work very hard on the things are going to drive margin and cost around the business to get certain growth trajectory on operating margin.
Scot Ciccarelli
Gary, given some of the competitive commentary whether it is Wal-Mart, Target, Dollar General et cetera, do you think there is going to have to be any kind of price adjustments at Family Dollar during the course of the years, that are really contemplating your expectations.
Gary Philbin
What we think we know is in our guidance. I think the current news that everyone is reacting too, clearly is in the grocery sector; it doesn’t mean that we are not on the front of that.
But our Family Dollar business is driven more by our convenience and controlling our own four walls. And those are things that we are focused on to stay in front of our 2017.
Scot Ciccarelli
Got you, thanks a lot guys.
Operator
And we will go next to Brad Thomas with KeyBanc Capital Market.
Brad Thomas
Yes, good morning, thanks for taking the question. I wanted to follow up on the some of the Family Dollar question and hoping you could just highlight a bit more in a way that you think you made the most progress from a daily execution blocking and tackling stand point and where you really want to focus the most in 2017?
Thank you.
Bob Sasser
Brad thank you and I would thank you for the question because it gives me a chance to brag a little bit on our folks who work very hard on, really just the basics, but the hard work that goes into running our stores and where are we while we know we are not in the finished line but I would color it this way. Our in stocks what our customers choose on the shelf is certainly better than where we started 18 months ago.
In our efforts to catch up on some of the deferred maintenance and cleaning and basics that we need to run full clean recovered store are in place. Our operational teams are heavily focused on our consistency of providing that, day in and day out.
And I commented on it but for our customers, it really revolves around first of month ready at Family Dollar, and that’s a very important focus for us to gain consistency with our customer and tend to show up with our first of the month business and our share of snap that we take and so those are things that I would say we improved on, we have more work to do across all of those. I’m pleased with the efforts that our folks putting towards it.
It is going to be one of the just basic table state conditional initiatives that we stayed with for several years. Because we always been able to find a way to improve as we start to be able to renovate some of our older stores, our customer store by store will see something that’s different.
And that’s just as important when we are talking about the stores that serve their neighborhood. So I am encouraged as to where we are at, more to do be done.
But it is consistent message and focus throughout the organization right now.
Brad Thomas
Great, thank you very much.
Operator
And we will go next to Paul Trussell with Deutsche Bank.
Paul Trussell
Hey, good morning. Just wanted to enquire about Duncan's hiring, if you can touch on that and then also if possible could you just describe in a little bit more detail, maybe the expectations on both comps end margins per banner.
So to the extent that how should we be thinking about comps for FD over Dollar Tree? Is it 200 basis points spread between the two banners as we saw in the fourth quarter perhaps the top process over the rest of the year or could that spread narrow or widen and similarly on margins.
Is there more opportunity or more pressure at the Tree segment versus FDO? Thanks
Bob Sasser
Hey Paul, this Bob, I will take the first part and in order to answer your question about Duncan let me take you back to about 18 months ago, when we paid the acquisition of Family Dollar. At that time if you remember there was no President at Family Dollar.
The President had already left, I thought that when we made the acquisition that it was extremely important first day to have a President in place and Gary Philbin has been President at Family Dollar, my partner here for long time, stepped up and moved down to Mathews and on day one we had a President for Family Dollar in place to leave the team. He has done a terrific job energizing the team, communicating, building the initiatives, getting extraction on the business, planning up all the inventory, doing all the things to revitalize the marketing campaign, customer communication.
I couldn’t be more proud of what Gary has done. But I was still one President short, with that combination and as Gary went down to Mathews, we launched him into a national search company looking for a President of Family Dollar and we found Duncan.
And I will tell you that Duncan, when we met, I knew that he was exactly right person to this job, his background, he had consumer products background. He had supermarket background.
He had big time discount store background and he had demonstrated throughout his career, real ability to build store teams, build merchant teams, build organization and to drive success. So we are pleased to bring Duncan on board, Duncan has been down there just short period of time and I will tell you, he stepped on it and started up running.
If you talk to the folks down at Family Dollar, I think you would hear from them, that they really have engaged with Duncan and he has engaged with them in a positive way. So we are very excited about adding Duncan to the management team.
In addition at this point in time, I brought Gary, we elevated Gary to Enterprise President and as Enterprise President Gary now has responsibilities for all of customer facing initiatives, all of merchandizing, all of store operations and real estate across both banners. Gary reports to me as does the shared services organizations report to me.
That was sort of how this all began and we are really pleased to have Duncan on board, we are also pleased to have Gary in the new role. I’ll let Kevin speak to the second part of the question.
Kevin Wampler
Good morning Paul, from a big picture perspective in regards to comps, obviously from a Dollar Tree side of the equation we expect the capitalization we have seen from the re-banner process to dissipate as we go through Q1 and Q2 and really be pretty much done by the end of Q2, so the back half really shouldn’t have any headwinds per say in the re-banners for the most of the parts. So that’s a positive on that perspective.
I think on the Family Dollar side, we think it’s been a little harder for us to forecast just in general I would say, this is from our rhythm standpoint at this point in time. So we take that into consideration, has been able to add more variability to the business.
It doesn’t mean we believe that they are not going to comp positive and able to be meaningful contributor at the end of the day. So I think the way we are going to look at is as we go forward as we are going to give you enterprise guidance and then when we report the quarter we will break it out and give you the two segments as well.
So that’s how we are thinking about it going forward. Maybe a little bigger picture for the year from a - speaking to the kind of the moving pieces within in our P&L so to speak on a consolidated basis, we do expect to see improvement in our gross profit this next year, this year we just started I should say.
Really we expect to mark on to continue to improve and both banners, we are going to work to lower our mark down as a percent of sales in our Family Dollar banner. We are continuing to see a little bit of geography chance from the stand point on Family Dollar banner.
We talked about this in the last quarter in the sense of our process where we are getting our co-opt dollars in that in our first cost, that supposed to offsetting advertising, so you can have a benefit in growth profit to see advertising expense and SG&A go up but that’s kind of geography difference. We know some of those improvements are going to be somewhat offset by the higher freight cost that we already talked about, but in general we are expecting gross profit to improve.
And on the SG&A side, I think we are expecting flattish to maybe slight improvement. I think the headwinds are SG&A and there is going to be pressure on store wages in both banners and again we got minimum wage increases in general average dollar rate, that are increasing more than what we have seen over the last probably four or five years realistically.
And then as well in SG&A we do have the advertising that I spoke to, that will be an increase year-over-year. Somewhat offsetting that then is we will expect lower depreciation based up on the range I gave this year at the mid-point of that range to be 620 million which compares to last year’s actual of 637 million, so depreciation is actually going lower.
So those kind of things as we look at that then if you look at our operating income, kind of that midpoint of our guidance, you would be looking at operating income, approximately 8.8% to 8.9% which is compared to the 8.23% that we reported on the press release today, so at midpoint still increase in the overall operating income if you go forward. So those are still some of the moving pieces in big picture as we move into 2017.
Paul Trussell
Thanks for the color.
Operator
We will go next to Dan Binder with Jefferies.
Dan Binder
Thanks for taking my question. I just had follow up on some of the pricing investment that was asked about earlier.
If you look at your Family Dollar results, you allowed gross margin to go up decent amount in the last several quarters and comps has been slightly negative, slightly positive recently and I am just wondering philosophically do you think if you were to take some of that gross margin and reinvest in price particularly against the backdrop with any of the competitors are that you might see better comp results and then benefit from the flow through on that.
Gary Philbin
Hi Dan, it’s Gary, one of the things you sort of pointed out with the question is the synergy does give some flexibility in our sector. We certainly monitor all of the price checks like everyone else and what is happening across sector but half of the channel as well.
And over the last 18 months we have had a very mind full exactly where we are compared to each of the targets we have by market. Our answer to that has been smart way to say which gives us flexibility and maybe even more than that point to the way we show our offers to our Family Dollar customer.
And so we do see a customer that shops differently, imagine for some month before, clearly the big driver for us and so what on shelf and end camps and whether it is on sale or price drop and that’s how we are approaching it. So looking forward we are going to watch everyone this year as we go under price checks and see what they are doing across shelves and react accordingly.
But to some degree you know it is not new news, everyone [ph] has been waving their flag on saying they are going to bring value. We are in a sector that delivers that with the convenience of factor attached to it for a customers and that’s how we are thinking about starting half of the year.
Dan Binder
And then just to follow up of this topic but again of course optimal question I know you can’t say lot about impact tax but if one word to go through, are you strongly opposed to breaking the backload that would be smarter to just keep that level and engineer the product packaging and account so forth to that level.
Gary Philbin
Dan again as I said in my prepared remarks has been passed and we really need to see what it covers and how it is done and what rules are and all that. I am sure we will be able to respond accordingly to that.
We have a lot of levers across both banners that we can do. I believe that pressure on the consumer is going to be and potentially it passed the way everybody is contemplating, it could be real issue for the consumer but as far as retailer where we judge as like everyone else and respond quarterly.
And I will tell you this at Dollar Tree for 30 years we have been at dollar. You talk about price point; I have been asked the question for long-long time among other issues as cost changes and expenses change and as the market change, inflation, deflation and the like.
And we are able to manage that because we are able to manage our source at Dollar Tree as long as dollar is unit of currency I believe we can offer the best values and we got business. So let’s wait till we get there but if it is past and if passed what rules are and then we will respond accordingly but I believe we have as much right as anyone to response and run a great business going forward.
So it will be different but let’s see what the rules are first.
Dan Binder
Great, thank you.
Operator
We will go next to Dan Wewer with Raymond James.
Dan Wewer
Hi good morning Bob.
Bob Sasser
Good morning.
Dan Wewer
Can you talk about the 300 new Family Dollar stores you are opening in FY17 and what will be the different about these stores compared to the Family Dollar store you inherited perhaps any commentary about rural versus sub-urban versus urban locations, things you are doing different, anything different with the store layout, number of coolers, give us that some inside as to how you see the long term vision for this concept changing.
Gary Philbin
Hi Dan, this is Gary let me take a swing at it first. We are excited to have 300 stores in the renovations and what you are going to see is in the headline is, how do we drive a more productive store for our customers and Family Dollars.
They really enhancing the shopping environment and you are going to see something that both drive traffic and enhance the customers shopping experience and especially on the discretionary side as well. And I am not going to give the blue print of everything that you will see out there but the model be in a small box style.
We certainly know how to run our box growth in urban and rural and what we are going to drive is really categories and adjacencies that make sense in a Family Dollar and I think our opportunity is to find the categories that are consistently drive in traffic week in and week out. Which is not always been the case as the box has been developed over time and we certainly have the pieces to make that their shopping environment for our customer.
Some of that can be our consumables and frozen food and on the margin pieces and elements that we do on seasonal with regard to the same party department at Dollar Tree is by a long shot. But certainly our customers still have birthdays and celebrate seasons and those are things that we can enhance and shine up in our Family Dollar world and the difference that we really have is, we still have apparel.
Apparel is a category that for us, we can win it. It has always been a matter of space and dedication that you give it within the store and so those are some of the items that when you combine with basic elements or smart ways to save sort of come to life in these stores in a way that show our customer categories, adjacencies and the items they need and want we think an exciting shopping environment, that’s what these will look like.
You’ll see a slip with both urban and rural locations. We know we can be successful on both and you’ll see that split, maybe not evenly between the two locations, but be fairly close.
Dan Wewer
Okay and then the second question. Most of the Family Dollar stores that we have visited, not all but most, the in-store standards are continuing to look a lot better than they did a year ago.
Again I’m sure that the same-store sales growth, you’re hoping to be a bit better, there’s been some discussions about pricing this morning. Our pricing surveys show your identical pricing is about 10% above Wal-Mart on consumable items.
The gap widening because of what Wal-Mart is doing. With the addition of Duncan and his background at Wal-Mart that believe in using pricing to drive share, do you think that could be the callas that could - his addition could be the callas that leads the Family getting more competitive in pricing on branded items?
Gary Philbin
Well, I’m gaining on it. I’m enjoying.
To have Duncan as a partner number one, Duncan’s going to help us tremendously, I would tell you that. And I would recon what Bob said, his experience doesn’t need me to polish it up, but -
Dan Wewer
Well, I was thinking in terms of pricing, with his background at Wal-Mart and using pricing promotional strategy to drive share. Do you think he’ll have a stronger voice for Family Dollar making that change?
Gary Philbin
He’s going to be impressive at Family Dollar. He’s going to have a stronger voice as anyone at the table.
Here is what I’d like to think about and listen, the price checks - I got more than everybody out in the field. The way I take a look at the price checks and whether it’s 10%, which I don’t know where you’re checking, but we react accordingly.
And it comes across both on shelf, everyday pricing, rooted on EDLP, we need to show our weekly promotion when we put our ad out there. We want to show our customers savings on price drop, which are some of the things they buy most often.
So it’s a combination of all of those things. We go to market, was that actually a Family Dollar customer and so we’re going to be mindful where a Wal-Mart is and certainly anybody in our sector.
But we have more than one tool to go to and show our customer value in our store and that’s how we think about it.
Dan Wewer
Okay, great. Thank you.
Operator
And we have time for one more question. We’ll go to [indiscernible] equity research.
Unidentified Analyst
Thanks for taking my question and I’m sorry if I missed this, but when you look at 2017, do you think the mix shifts more into discretionary or do you expect consumables to stay just as strong as they are?
Bob Sasser
Well, I’d say lower that - strong as they’ve been. In my opinion the mix at Dollar Tree, you have two different banners here, so we’re lot more discretionary on the Dollar Tree banner than the Family Dollar banner.
My expectation is it will continue to grow both discretionary and consumable, but the mix is going to be pretty much - I think pretty much the same. At Family Dollar, I think there’s an opportunity to sell a little more discretionary, we’re going to still go after the consumable business, we want to be the place where our customers shop for the things they need every day.
We want to be convenient, we want to have great values for our customers on all the things that they need, so we’re not back and down on the consumable business. At the same time, we want to offer them more of the things that are discretionary at great values.
Gary mentioned some of the things and everybody has birthdays, our apparel business, our home business, we have I believe terrific opportunities at Family Dollar in driving more discretionary business than our home departments. So it’s a good question, but it’s at the high level that that would be my answer.
As we get down and to walk into the store four by four, that’s how we actually look at it and where we should expand, where do we have the opportunity to expand, what our customer tell us that they want more off, how are they responding to just when we expand a category and that’s really what we’re looking at.
Unidentified Analyst
Thank you.
Bob Sasser
Operator
And that will conclude our question-and-answer session. At this time I’d like to turn the conference back over to Randy Guiler for any additional or closing remarks.
Randy Guiler
Thank you for joining us on today’s call and for your continued interest in Dollar Tree. Our next quarterly earnings conference call is tentatively scheduled for Thursday, May 25, 2017.
Thank you and have a good day.
Operator
That does conclude today's conference. We thank you for your participation.
You may now disconnect.