Aug 24, 2017
Executives
Randy Guiler - Vice President of Investor Relations Bob Sasser - Chief Executive Officer Gary Philbin - Enterprise President Kevin Wampler - Chief Financial Officer
Analysts
Rob Iannarone - RBC Capital Markets Matthew Boss - JPMorgan Paul Trussell - Deutsche Bank Michael Lasser - UBS Dan Wewer - Raymond James Charles Grom - Gordon Haskett Kelly Halsor - Buckingham Research Group Brad Thomas - KeyBanc Capital Market
Operator
Good day and welcome to the Dollar Tree Incorporated Second Quarter Earnings Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Mr. Randy Guiler, Vice President, Investor Relations.
Please go ahead, sir.
Randy Guiler
Thank you, Michelle. Good morning and welcome to our conference call to discuss Dollar Tree's performance for the second fiscal quarter of 2017.
Participating on today's call will be our CEO, Bob Sasser; CFO, Kevin Wampler, and 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 8-K, 10-Q, and 10-K, which are on file with the SEC. We have no obligation to update our forward-looking statements and you should not expect us to do so.
At the end of our prepared remarks we will open the call for your questions. Please limit your questions to one and one follow-up question if necessary.
Now I will turn the call over to Bob Sasser, Dollar Tree’s Chief Executive Officer.
Bob Sasser
Thanks, Randy. Good morning, everyone.
This morning, we announced our results for the second quarter of fiscal 2017. Sales increased 5.7% to $5.28 billion, and same-store sales increased 2.4%.
By segment, comp sales for the Dollar Tree banner increased 3.9%, and for the Family Dollar banner comp sales increased 1%. Our gross margin rate improved 50 basis points to 30.8%.
Operating income increased 17.4% to $419.5 million and our operating margin rate improved to 7.9%. Earnings per share increased 36.1% to $0.98 versus $0.72 in the prior year's quarter.
I’m extremely pleased with the quarter delivered by both the Dollar Tree banner and the Family Dollar banner. Dollar Tree continues to gain momentum and deliver its 38th consecutive quarter of positive comp store sales.
Both banners were successful in driving sales, enhancing gross margin, and leveraging SG&A effectively as compared to the prior year's quarter. Our total enterprise sales exceeded the high end of our guidance range.
Both banners delivered positive comp store sales growth, both banners showed improvements in gross margin, and operating margin improved 80 basis points from 7.1% last year to 7.9% for the quarter this year. I’m incredibly proud of our organization.
Our merchants are focused on exceeding the customer's expectation for value. Our store operators across the chain have worked very hard to be certain that shelves are filled, promotions set, and product is on the sales floor ready to welcome and serve our customers.
Our supply chain is focused on efficiency and ensuring continuous improvement in service to support our stores. All of our support teams have embraced our shared services model and efforts to more cost effectively support both of our large and growing banners, Dollar Tree and Family Dollar.
Our business model is strong and resilient. We operate in the most attractive sector in retail with more than 14,500 store locations across North America.
Our goal is to deliver both value and convenience to our customers, and we do this through two solid and differentiated concepts. Our 6,500 Dollar Tree stores are fixed price point small box retail stores located primarily in suburban markets serving a broad range of income levels.
Our 8,000 Family Dollar stores are multi-price point, small box neighborhood discount stores serving the needs of customers largely in urban and rural locations. Together, we are a diversified business of two well known and recognized banners with years of growth ahead of us.
Additionally, I could not be more pleased with our Dollar Tree Canada team. Our merchants and our store teams continue to run great stores and continue to gain momentum.
Dollar Tree Canada performed extremely well across the board during the quarter in sales, gross margin, SG&A, and operating margin. Today, we operate 224 stores in Canada with the opportunity to ultimately operate a 1000 stores north of the border.
In addition to brick-and-mortar stores, our online business at Dollar Tree Direct is growing in size and performance. Dollar Tree Direct provides an opportunity to broaden our customer base, drive incremental sales, expand brand awareness, and attract more customers into our stores.
I am very pleased with the year-over-year trends we are seeing in both traffic and sales in our Dollar Tree Direct business. For the fourth consecutive quarter, we’ve seen mobile traffic on our site outpace visits from desktop computers and tablets.
We’ve enhanced our product video capabilities. These videos are used on our website and made available through email, Facebook, Pinterest, and Blog Post and are receiving very positive feedback from our loyal online customers.
Please visit our site at dollartree.com. We have a concept that customers love.
When times are tough, we are a part of the solution to help that customer make ends meet; when times are better, customers appreciate our convenience and our value. Shoppers today are focused on value and convenience more than ever and that’s exactly what Dollar Tree and Family Dollar stores provide, value and convenience.
Now, I’ll turn the call over to Gary to provide more detail on our performance and our priorities.
Gary Philbin
Thank you, Bob. Good morning everyone.
I am very pleased with the strong results in our second quarter and with the performance from each of our business segments. The Dollar Tree banner delivered its best quarterly call since Q4 2014, and continues to deliver sector leading double-digit operating margins.
The Family Dollar banner delivered positive same-store sales and a 120 basis point improvement in operating margins. We are seeing traction throughout the business.
Our Dollar Tree Canada team is simply taking care of business by running great stores. Our 224 store division is delivering comps well above the company average, and of course our Dollar Tree Direct business, lot smaller portion of our business, continues to show nice year-over-year growth in sales, site visits, and profitability.
Dollar Tree highlights for the quarter include our top performing categories; snacks, beverage, party supplies, stationery -, household products, food, and candy. Sales performance was again led by consumables, both consumables and discretionary comped better than 3% for the quarter.
All three months comped positively in the quarter, and July was the strongest month. Geographically, Dollar Tree's same-store sales were strongest in the Northeast, Midwest, and South West, and all of our operating zones delivered positive comps greater than 2%.
The Dollar Tree business continues to be strong, consistent, and growing. These results represent our 38 consecutive quarters of positive same-store sales, and our operating margin continues to lead the value sector.
Our second quarter performance continues to validate the relevance of the Dollar Tree brand. Customers love our fixed price concept and continue to shop for value and convenience.
In recent quarters, we have selectively and strategically invested in labor to ensure that our stores are getting the product to our sales floor. We are very pleased with the traffic and sales results, as well as the flow of our inventory we are seeing in these stores.
For Family Dollar, the highlights for the quarter include; our top performing categories were snacks and beverage, refrigerated frozen food products, school supplies, and bedding. Our comp performance was again driven by consumables.
July represents our strongest comp month for the quarter. May was positive, June was slightly negative.
Geographically, Family Dollar same-store sales growth for the quarter were strongest in our Northeast, Midwest, and West zones. We are now just over two years into our integration and we continue to make meaningful progress in Family Dollar around the key foundational elements that will drive performance, improving our store shopping experience with our table stakes initiatives, focusing on merchandising value for our customers, and consolidation of our shared services.
Evidence of our progress can be seen in our second quarter results, positive 1% same-store sales, 60 basis point improvement in gross margin, 60 [ph] basis point of SG&A leverage on that 1% comp, and 120 basis point increase in operating margin. And importantly, as we continue to progress on our integration, our customers are seeing cleaner stores, greater values, improving product assortments, more consistent in stocks, and better customer service in our stores, and they are rewarding us with their repeat visits.
We strive to be the neighborhood store of choice for the fill-in trip shopping needs of our Family Dollar customers that typically live, work, and shop near our stores. On last quarter's call, I shared details regarding our renovation initiative for Family Dollar stores [indiscernible] had not been touched in a material way in quite some time.
During the second quarter, we completed 111 Family Dollar store renovations. Elements of the renovation included improved adjacencies and more productive end caps, expanded beverage and snacks, including immediate consumption cores near checkout, expanded assortment of food and coolers and freezers, and updated airfare assortment, expanded adult beverage in some stores; and exciting power alley to promote Dollar well items, and a faster checkout process for our customer.
We are very pleased with the initial results we are seeing in these stores and especially about the feedback we are receiving from our store teams and customers. We now estimate that we can complete 350 renovations for fiscal 2017.
We continue to make progress as planned with elevating our private brand assortment in the stores. These private brands are being developed to provide national brand comparable quality and terrific values to support our compare and save component of our smart ways to save program.
Each of the brands will contain 100% customer satisfaction guarantee and these brand improvements are taking place across the store and are already impacting performance in household products, candy, snacks, food, beverage, hardware, Vitamins and other categories to come soon. We look forward to providing updates to our progress in the quarters ahead.
Now looking at real estate in the second quarter, we opened a total of 133 new stores, 76 Dollar Trees, 57 Family Dollars. We relocated or expanded 31 stores, 24 Dollar Trees and 7 Family Dollars.
We renovated 111 Family Dollar stores as part of the renovation project that I just spoke about for a total of 275 projects during the quarter. We also added freezers and coolers into 101 Dollar Trees stores during the second quarter to bring our total Dollar Tree stores with freezers and coolers to just over 5,000, 5,011 to be exact.
During the quarter, we closed 34 stores 14 Dollar Trees and 20 Family Dollars. And we ended the quarter with 14,581 stores, 6,506 Dollar Trees and 8,075 Family Dollars.
I would like to share that last week we held our annual leadership conference in Charlotte. This is our opportunity to share, learn, to recognize, and reward our field leadership at Family Dollar.
We had great meetings and continued that our field leadership teams are aligned, focused, and energized as we started the exciting back half and holiday season ahead of us. We shared the excitement of the merchandise plans, and will make Family Dollar stores and neighborhood store of choice for value and convenience as we go through the holiday period and first of the months ahead of us.
I will now turn the call over to Kevin to provide more detail on our second quarter performance and our outlook for Q3 and the full year. Kevin.
Kevin Wampler
Thanks Gary and good morning. Total sales for the second quarter grew 5.7% to $5.28 billion.
Dollar Trees segment total sales increased 8.4% to $2.59 billion and Family Dollar segment total sales increased 3.3% to $2.69 billion. Enterprise same-store sales increased 2.4%.
Canadian currency fluctuations had minimal impact on our comps during the quarter. On a segment basis, same-store sales for the Dollar Tree banner increased 3.9% and for the Family Dollar banner increased 1%.
Gross profit for the combined organization increased 7.6% to $1.63 billion for the second quarter 2017, compared to the prior year's quarter. As a percentage of sales, gross profit margin improved 50 basis points to 30.8% versus 30.3% in the prior year's quarter.
Gross profit margin for the Dollar Tree segment was 34.6% for the second quarter, a 30 basis point improvement compared with prior year second quarter. Factors impacting the segment's gross margin performance during the quarter included lower merchandise cost favorable freight costs, lower shrink as a result of favorable inventory results, and lower occupancy costs, partially offset by higher distribution cost as a percent of net sales resulting primarily from our new Cherokee County South Carolina DC opening in Q2 of last year.
Gross profit margin for the Family Dollar segment was 27.2% during the second quarter, compared with 26.6% in the comparable prior year period. The 60 basis point improvement was primarily due to lower merchandise cost, and lower markdowns, partially offset by higher shrink distribution cost, and occupancy cost.
Consolidated selling, general and administrative expenses, as a percentage of net sales, in the quarter improved to 22.9% from 23.1% in the same quarter last year. Q2 SG&A expense for the Dollar Tree segment as a percentage of sales increased 10 basis points to 23.4%, compared to the prior year's quarter of 23.3%.
Higher store payroll cost, incentive compensation, repairs and maintenance, and legal fees were mostly offset by lower health insurance cost, lower store supplies, and utilities as a percentage of sales. SG&A expense for the Family Dollar segment as a percentage of sales was 22.4%, compared to 23% in the prior year's quarter.
The 60 basis point improvement was a result of lower depreciation costs, lower workers compensation and general liability insurance cost, lower payroll cost related to the harmonization of vacation policies, and lower debit and credit card fees. These were partially offset by higher operating and corporate expenses, primarily related to advertising cost, health insurance, store supplies, and business taxes.
In addition for Q2, the company took a $2.6 million receivable impairment charge related to Dollar Express. The company believes that there will be no additional impairment charges related to dollar express going forward.
Operating income for the enterprise increased to $419.5 million, compared with $357.2 million in the same period last year. Operating income margin increased to 7.9% for the quarter from 7.1% in last year's second quarter.
Operating income margin for the Dollar Tree segment improved 20 basis points to 11.2%, compared to the prior year quarter. Operating income for the Family Dollar segment increased $35.7 million to $130.4 million, a 120 basis point improvement as a percentage of sales when compared to the prior year's quarter.
Non-operating expenses for the quarter totaled $75.9 million, which was comprised primarily of net interest expense. Effective tax rate for the second quarter was 32%, compared to 36.9% in the prior year's quarter.
The decrease was primarily attributable to the tax benefit of $9.9 million or $0.04 per share related to a decrease in North Carolina state tax rate, which decreased to deferred tax liability related to the Family Dollar trade name intangible assets. For the second quarter, the company had net income of $233.8 million or $0.98 per diluted share, compared to the reported net income of $170.2 million or $0.72 per diluted share in the prior year's quarter.
Combined cash and cash equivalents at quarter-end totaled $693.3 million, compared to $866.4 million at the end of fiscal 2016. During the quarter, the company prepaid $5 million of its Term Loan A and accelerated $1.2 million of amortizable non-cash deferred financing costs.
Our outstanding long-term debt is approximately $5.8 billion. The company continues to focus on stated goal of returning to investment grade for its debt ratings.
We expect our rent adjusted debt to EBITDA ratio to be below 3.5 times in early 2018. Inventory for the Dollar Tree segment at quarter increased 2.9% from the same time last year, while selling square footage increased 5.3%.
Inventory per selling square foot decreased 2.2%. We believe the 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 5.2% from the same period last year, and decreased 6.3% on a selling square foot basis. We’re pleased with the progress we’re seeing on in stock levels on key items.
We’re continuing to review merchandise assortments and believe our current inventory levels are appropriate for the third quarter. Capital expenditures were $161.4 million in the second quarter of 2017 versus $180 million in the second quarter last year.
For fiscal 2017, we’re planning for consolidated capital expenditures to range from $740 million to $760 million. Capital expenditures will be focused on new stores and remodels, including few development stores.
Our plans include renovating 350 Family Dollar stores in 2017, up from 250 previously, 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 Centre in Warrensburg Missouri, and the continued build-out of a new office building for the store support centre here in Chesapeake Virginia. Depreciation and amortization totaled $151.3 million for the second quarter.
Depreciation and amortization expense was $161.9 million in the second quarter last year. For fiscal 2017, we expect consolidated depreciation and amortization to range from $610 million to $620 million.
Our updated outlook for fiscal 2017 includes the following assumptions. [Indiscernible] includes a 53rd week.
The extra week in the fourth quarter is expected to add $400 million to $430 million to sales and $0.19 to $0.22 to earnings per diluted share both of which are included in guidance. We expect continued pressure on store payroll based on states increasing minimum wages and general average hourly rate increases.
We have budgeted higher import trade cost in a year ago and higher diesel cost for the year. Net interest expense will be approximately $70.5 million in Q3 and approximately $74 million in Q4, due to the extra week.
Our guidance does not include any share repurchase for 2017. We cannot predict future currency fluctuations so we have not adjusted our guidance for a change in our currency rates.
Our guidance also assumes a tax rate of 33.8% from the third quarter and 34.9% for the fiscal 2017. Weighted average diluted share counts are assumed to be 237.6 million shares for Q3 and 237.5 million shares for the full-year.
For the third quarter, we are forecasting total sales to range from $5.20 billion to $5.29 billion and diluted earnings per share in the range of $0.83 to $0.90. These estimates are based on low single digit same-store sales increase and year-over-year square footage growth of 3.6%.
For fiscal 2017, we’re now forecasting total sales to range between $22.07 billion and $22.28 billion, compared to the company's previously expected range of $21.95 billion to $22.25 billion. The company now anticipates diluted earnings per share for fiscal 2017 will range between $4.40 and $4.60, which includes $53.5 million or $0.14 per diluted share of receivable impairment charges.
These estimates are based on low single digit same-store sales increases and 3.9% square footage growth, and includes the benefit of 53rd week occurring in Q4 of fiscal 2017. I’ll now turn the call back to Bob.
Bob Sasser
Thanks Kevin, and thank you Gary. Just over three years ago, on July 28, 2014 we announced our agreement to acquire Family Dollar.
At that time, I described the transaction as a transformational opportunity. There has been a great deal of work done since the transaction was completed two years ago in July 2015, and we still have a lot of work to be done, but importantly, I’ll tell you that our leadership team is as excited and as enthusiastic as ever about the opportunity ahead.
The combination of Family Dollar and Dollar Tree gives us a strategic advantage. We have combined two great brands, Family Dollar, your neighborhood discount store; and Dollar Tree where everything is a dollar.
Together, we operate more than 14,500 stores and the discount variety stores space, but our stores are not all the same. We operate more than 6,500 Dollar Tree stores in more than 8000 Family Dollar stores.
Each banner serves the market in a distinctly different way. Each is complementary to the market.
The power of both banners extends our growth opportunity and gives us the ability to serve more customers and more ways. We have the flexibility to open a Dollar Tree or a Family Dollar store or both across markets.
With this flexibility, we have expanded our ability to operate, grow, and serve more customers in more ways and that’s exactly what we're doing. We have the singular opportunity to place the appropriate banner in a market based on customer relevance while leveraging our back-office functions.
And as you can see in our results, our Dollar Tree business is benefiting from the combined scale of our organization and our Family Dollar banner is gaining traction as we leverage our back-office cost through shared services. We have a tremendous opportunity through the power of both banners to drive sales productivity, enhanced gross margin, and better manage our cost structure each contributing to our operating margin improvements over time.
In both banners, our focus is on the customer. The main goal of our merchants is to offer a compelling assortment that satisfies our customers’ wants and needs while giving them the best value for the money.
We’re creating merchandise energy and a fun shopping experience with product that is seasonally relevant and trend relevant. Our operators are focused on running great stores, stores that are bright and clinging in orderly, stores that are in stock and filled with surprising values and a friendly shopping experience.
We’re focused on profitable growth. While we work to improve the productivity and our more than 14,500 existing stores, we continue to grow the store base.
This year, we’re opening 650 new stores and we have years of growth ahead. We have identified an opportunity for 26,000 stores across North America.
We’re focused on improving performance. We operate in a culture of continuous improvement.
Every event and season for our business should be better than the one before. We’re pleased with the successes we’re seeing in our store renovation program and we’ve raised our fiscal 2017 target from 250 to 350 Family Dollar renovations.
We’re focused on our balance sheet. This past quarter, we prepaid $500 million on our long-term debt.
We have now paid down approximately 2.5 billion since January 2016, and will continue to pay down debt as appropriate. As we said when we finalized the acquisition, our plan is to use free cash flow to pay down debt and return to investment grade.
As we approach that benchmark, we will continue to assess our capital priorities and we will continue to deploy our capital for the benefit of our long-term shareholders. We’re focused on long-term shareholder value.
We’re committed to managing our business for the benefit of our long-term shareholders by building a sustainable concept that will endure for years to come. We’re a growth company and the most attractive sector and retail, opening more stores, capturing synergies, improving efficiencies, generating significant free cash flow, paying down debt, focusing on our customers and running great businesses, it’s a great time to be Dollar Tree.
Operator, we are now ready for your questions.
Operator
Thank you. [Operator Instructions] And our first question we will hear from Nick Ciccarelli [ph] with RBC Capital Markets.
Rob Iannarone
Hi guys, it’s Scot Ciccarelli and Rob Iannarone on for him today. Just going through the results today, gross margins were obviously a bit better, you called out a few of the different things you are doing there , thinking more about private label initiatives you’ve talked about in the past, can you just give us an update on how that’s going, the transition potentially to Home Line from Family in the Family Dollar stores?
Gary Philbin
Hey Scott. Hello, this is Gary.
The way to think about it is we are taking a look by category, but the biggest change our customers are going to see in stores is going to be the brand changes. So, particularly in food and HBA where there’s been a Family Gourmet or Family Dollar label on it.
You are going to tend to see what we have seen in our private brand trash bags Home Line. So, it upgrades the packaging for sure.
In some cases, we’re upgrading the product and quality as well, but I think it really allows us to put the product in the face to what the customer sees on par with the national brands in a better way. The value of course goes without saying that it is part of our smart way to save, our compare and save piece for private brand is important, and it’s our intent to continue to drive private brand penetration in the right category.
We’re seeing that with some of the repackaging done already. So customers are responding to it.
So, we have probably a dozen packages or brands out there right now, more are coming, we’re excited about it and it’s just one more arrow in our quiver that we think is going to drive performance up and down our isle, especially in the consumable portion of our store.
Rob Iannarone
Great, thanks. And just as a follow-up, a rough idea of where penetration stands for private label and hope sort of Dollar Tree and Family Dollar and maybe where it could go or if you are kind of comfortable with where it’s up?
Gary Philbin
Well, I don't think we ever laid that number out, but I would say we have a strong base for our private brand today and we either measure it with a discretionary added in there or not. We look at both segments of our business on the consumable and discretionary.
I think we tend to focus may be a little more on the consumable side of it just because that’s what our customer is buying most often. It’s what she sees as the best way to say when she sees looks at the comparison to national brands often, and so we measure - we have a historical 20% on the consumable side and we certainly have some opportunity to grow that as we push it into this year and the balance of 2018.
Rob Iannarone
Great. Thanks guys and congrats again.
Operator
And next, we will move to Matthew Boss with JPMorgan.
Matthew Boss
Thanks. Congrats on a nice quarter guys.
So on Family Dollars comp improvement; I guess what did you see from a traffic perspective as the quarter progressed? And then as we’ve been in some of your stores more recently, we’ve seen the rollout of a number of high velocity value items, can you speak to the size and scale sourcing opportunity, may be some learning’s as you are going to market as a combined entity and just the best way to think about the second-half of the year and beyond in terms of your opportunity to improve values at the Family Dollar concept?
Bob Sasser
Thanks Matt. I think during the quarter we saw both ticket and traffic increase, and I would say for the Family Dollar segment to see the increase in traffic was really the driver for the quarter.
So that was good to see. So, as we look forward into the second half, thanks for calling out some of those values, but as we go through the assortment that we’re reinvigorating category by category, those are some of the elements that customers are going to see that we think - just two things for us, it’s going to drive additional traffic because it’s what’s new, it’s what’s exciting in the banner, and for the average ticket of course we think we can sell that one more item.
I mean, both banners are very focused on that very fundamental piece of retail and can we sell one more item and we have sent our store managers and folks to do that. The combination of what people will see with some new assortment and the opportunity in the back half of course is driven around two things at Family Dollar, we’ve got to be right on the first of the month.
It is when our customers have more money in their pocket, they count on us, if we’re convenient , if we show the right values, they will spend more with us. But we also got the big holidays ahead of us at Family Dollar, and we’re excited about that because of what we’ve done on some of the merchandising really kicking off with game day around Labor Day, going to Halloween, Thanksgiving.
And I would tell you with the meeting we had last week, we have our teams jazzed up on what we think the Christmas season can become at both banners, but really with some reinvigoration at Family Dollar. So it’s the combination of doing all the things that we say we’re going to do on the product side, but I would also say it’s table stakes, the shopping environment that we’re still working very hard on that our operators are focused on, so get the right items on the shelf, keep them full, and let’s have a store environment that we think our customer is fun, full, clean, and we know we can continue to drive more traffic into the back half.
We’re focused on delivering great first of the month and great holidays at Family Dollar for the back half of the year.
Matthew Boss
It’s great. And just a follow-up as we think about SG&A at Family Dollar, Kevin where do we stand on the synergy related to operating investments today and just beyond this year, how best to think about the comp needed to leverage SG&A at the Family Dollar concept?
Kevin Wampler
Yes Matt, I think as we look at it, obviously the teams continue to work on our goal of synergies and obviously the reinvestment of that, you know as we’ve said from day one, the expectation has hit our goal and hopefully exceed our $300 million goal with $300 million of one-time investment. I think the investment side, there is probably still some system side of things that will continue to incur as we go forward, but I think we are seeing some benefits and some of the line items as the procurement teams have worked to drive cost out of the business.
So it’s definitely, it’s a component it’s all obviously within the guidance as we go forward, but we feel good about where we're at, and where we are able to do. And I think the big thing is it is a lot of people working very hard to improve the overall business going forward.
Matthew Boss
Great. Good luck guys.
Operator
[Operator Instructions] Next we will move to Paul Trussell with Deutsche Bank.
Paul Trussell
Good morning. Very strong Dollar Tree top line results.
Kevin, can you just circle back to your comments on the puts and takes on the Dollar Tree banner margins? I just want to make sure I fully understand the impact of may be some of the bonus accruals and some of the other items you mentioned?
Because I would have thought there may have been an opportunity for a bit more flow-through this quarter.
Kevin Wampler
If you are speaking to SG&A, I assume Paul and obviously one of the call outs - there really has been a call out since we give guidance at the beginning of the year, the fact that higher store payroll costs. So that’s been an expectation.
Obviously there’s been state directed minimum wage increases. We have seen our average hourly rate increasing at a faster rate than maybe since before the recession.
So I think it speaks a little bit too full employment as well as the state rates. And then Gary touched on the fact, we made a conscious decision to spend more on our stores to make sure that we’re providing a great shopping experience and our shelves are full with the unbelievable values that our customers expect, and we think that that is very much an important piece of it.
And the other side of it is, one of the other things I spoke to obviously was incentive compensation and the fact that so if you think about a year ago we had a little weaker comps than this year, so obviously we do reward our store managers accordingly and when things go well and so our store bonuses on a year-over-year basis we’re going to run high as a percent of sales and our overall incentive comp in general is going to run a little higher as a percent of sales. And then just the other couple of other items we called out as repairs and maintenance being up and again we don't defer maintenance.
We fully believe on getting things done and keeping our stores in shape, and so there are a couple of areas around HVAC. And freezers and coolers, which as our fleet ages will have some ebbs and flows to that.
So not totally unexpected and in the last time we called out was legal in this effect of last year or year ago legal expenses where fairly really low, probably lower than normal on a run rate basis and in this year they are probably a little more normalized. So those are just some of the things.
Obviously, we did get leverage in other areas that we called out that offset some of these things, but again as I would speak to SG&A there is ebbs and flows to any given quarter, but the expectation for us in every any given year is that we’re going to improve on our SG&A.
Paul Trussell
That is helpful. And then just a quick follow-up, just want to ask about the promotional environment, obviously all our focused and have spoken to providing value items within the Family Dollar banner, but just can you speak to what you are seeing around pricing promotional levels from your peers in the marketplace and if you’ve had to react in a manner more meaningful than originally planned?
Gary Philbin
Paul this is Gary and I will assume that most of that is aimed at Family Dollar. I think the Dollar Tree banner, I think we were very excited about the performance and continues to show great values and our customer is responsive.
At Family Dollar, obviously we’re paying attention to everything that’s in the news and headlines and obviously the new entry of competitor into the space, but I go back to - it’s - we get caught up on the grocery communication that flows through the marketplace, but we are very focused at Family Dollar to being value and convenience. And we drive the items that are most important to our customers with our smart way to saving.
So for us, our customers can save on - and we have every day a little price that we have a powerful price drop in the ad that we have smart way to save that they can save on the private label item than we have on the shelf. So, we do measure and check and track everyone's retail with our strategy.
We put the items on end caps, on promotion, and one of our smart ways to save elements based on what drives traffic into a Family Dollar. So we are certainly aware of what is going on out there.
We watch it, but we’re running our game plan that drives our ability to drive traffic and average ticket into our stores and really want highlights both banners, but Family Dollar I would give great credit to one of our strongest performing categories less consumables during the quarter. So, with all the activity out there, great credit to our teams to continue to drive progress on that and showed up in results, which is the most important part of it.
Paul Trussell
Great to hear. Thanks for the color and best of luck.
Operator
And next we will move to Michael Lasser with UBS.
Michael Lasser
Good morning. Thanks a lot for taking my question.
So there was clear progress at Family Dollar this quarter, but arguably when you bought this business three years ago, you probably didn't anticipate three years later that you would be comping up only 1% and 2 to 3 months out of the quarter were positive, so is there evidence that perhaps the potential customers that haven't recognized the changes that have been made to the store or are there other factors that are standing in the way of this business reaching its potential.
Bob Sasser
Michael, first of all we bought the business two years ago that’s when we closed on it. Over the last two years we have done just a whole lot of things bringing Family Dollar along.
We have cleaned up the stores. We had cleaned up the merchandise.
We reclaimed the end caps. We’ve changed the way we compensate people.
We've changed the organizational structure. We’ve just done a lot of work that we're really proud of.
The last quarter was just a terrific performance, 1% comp and led by traffic and led by consumables and with all the talk and discussion about price pressures and competition and new competition and consumables in the face of all that that’s what led our earnings for the quarter in our Family Dollar business. So clearly we are hitting the sweet spot more closely on the customer then in the past.
I think we are improving the way we’re performing, with the way we’re running our stores. I think we’re getting traction, I know we’re getting traction on our smart ways to save with our price drops and our ads and our digital coupons and all of the things that we’re doing in the store around value and surprising value and real shopping experience in our stores.
So, I think I couldn't be more proud of where we are. Two years into this, with all the things that we’ve done it’s a large company.
We have totaled over 14,500 stores 23 distribution centers, 180,000 people working for the company, 48 states and five Canadian provinces, and I think we’ve done just outstanding. Our management team has led the improvements in Family Dollar in a very outstanding way.
Now we still have room to improve. We’re not stopping here.
My expectations is that we will continue to run great stores, improve our merchandise values, relate to the customers, engage with the customers. You know the people that are successful run great stores and offer great value.
And if you look back at this year and any year, you will always see great companies, great retailers with great stores, and great value, and a focus on the customer. That's what we’re doing, we can do better, but I certainly am proud of where we were in the second quarter.
Michael Lasser
In my follow-up question - and that’s helpful, very helpful Bob. My follow-up question is that, I appreciate the fact that you don’t want to guide margins by segment by quarter, but if we assume that the core business, if margins expand in the third quarter at the rate that was similar to 2Q, it implies that Family Dollars margin expansion flows a bit in the third quarter compared to what you experienced in the second quarter, despite a much easier comparison.
So, are there cost pressures or just being conservative, might there be other factors that would stand in the way and sustaining this type of performance?
Gary Philbin
I will let Kevin answer, but I will tell you there is always something, we don't know, we guide, I think we give pretty good guidance and I think we’ve had a history of being very transparent with our guidance and hitting our guidance by the way, but there’s always something you don't know. I’m pretty good about the guidance that we have given for the third quarter and for the rest of the year.
Kevin can share more.
Kevin Wampler
I think Michael as we look at it, again, we don't give guidance by banner, but again we are expecting improvement. We said after Q1 that we really had expected that the back half of the year had the opportunity to be better than the first half in total, and obviously Q1 was a tough quarter, we’ve obviously showed significant improvement in Q2.
As we look to the back half and we look to the full-year guidance now, our midpoint on operating income for the entity, excluding the receivable impairment is roughly about 8.9% versus 8.23% last year. So as you look at it, I think that’s really significant improvement year-over-year as an entity.
And obviously it takes contributions from both banners to make that happen. It’s not a singular Dollar Tree, it’s not singular Family Dollar both banners have to pull their weight and there’s an expectation of that, and yes we’re looking forward to the back half to the point of it gets into the holiday season.
Seasonal opportunities are always something we look forward to, to build our business on beyond just the consumable side of it. So, we’re looking for word to a good second half and I think our guidance as we’ve provided it, and in a sense raised it for the back half we feel pretty good about it.
Michael Lasser
Thank you very much. Good luck with the second half.
Operator
And next we will move on to Dan Wewer with Raymond James.
Dan Wewer
Thanks. Kevin wanted to ask you about the tax rate guidance?
Is the lower effective tax rate during the third quarter in the year coming from the same development that took place in North Carolina in 2Q? And is this a transitory lower tax rate or will this continue into 2018 and beyond?
Kevin Wampler
You know there is always a lot of moving pieces as it relates to taxes as you can imagine, but the Q3 guidance, which is a 33.8% rate, which is a little lower than our normal rate really takes into consideration what we believe as it relates to our provision to return review that will take place. So really the true up of last year's tax return in a sense, so it takes into consideration things that we leave around that.
So, on a go forward basis, I believe this is a new lower tax rate going forward not necessarily now, I think each and every year stands on their own based upon the facts that we know and so I think next year when we give guidance at the end of the year that you would see a tax rate probably similar to what you would have consistently seen from us which is around that 37% to 38% range.
Dan Wewer
Okay. My other question revolves around the re-banners, the Family Dollar and deals stores the Dollar Tree format, can you discuss how much of a benefit that was for the Dollar Tree banner same-store sales growth?
Kevin Wampler
From an overall point of view, let’s maybe take a step back in the sense that we have spoke to the re-banners, we have re-bannered 300 stores, 300 Family Dollar stores to Dollar Tree. We have taken our deals chain of 210 stores and re-bannered those to Dollar Trees as well.
We’ve talked about cannibalization over the last year, up until this point as to how much that it affected us and I think last quarter we said it was about 30 basis point cannibalization effect on the Dollar Tree banner. From a go-forward standpoint, basically all those stores are basically in the comp base for the most part going forward.
So we really see it as a benefit as opposed to cannibalization as we go forward because these stores should mature. And on a go forward basis, typically a new store would mature over the first 3 to 4 years and those 3 to 4 years is when you tend to see the biggest comps, so the expectation is that those are actually a tailwind for us as we go forward.
Dan Wewer
So just to make sure I understand the 500 odd number of re-banners where those are all included in the same-store sales calculations for the Dollar Tree segment in this period or is this a benefit that’s not yet showing up in the comp sales results?
Kevin Wampler
The vast majority of them are already in the comp base. I think there is a few that are not, but the vast majority are in the comp base.
Dan Wewer
Okay. Thank you.
Operator
And we will move on to Charles Grom with Gordon Haskett.
Charles Grom
Thanks. Good morning.
The 3.9% comp at the tree was like you said the best in 10 quarters, just wondering if you could shake out the changes you made to the assortment or marketing adjustments in the second quarter, and then when we look at the back half, I know you provided low single-digit guidance, but how should we think about modeling each of the divisions in the second half?
Bob Sasser
Well I can talk to you about the color on the sales initiatives at Dollar Tree, it’s, we continue to invest in the customer and stock on basic, given them what they did in maximizing the shopping trip or things that we focus on and things that we work to do. We want to be first of the month already, just like Family Dollar, our Dollar Tree stores a lot of the business depends on folks when lower income folks, especially first of the month when they have jingle in their pockets and money to spend we won't have chunky displays and all of the key basics available for them.
At Dollar Tree we talk a lot and more on more we talk about the same things. At Family Dollar, we talk about seasonal energy, and during the quarter we had some pretty good season starting with Mother's Day, and Memorial Day, and rolling into Father's Day, it’s Father's Day so you can't really hang out on that one, but it is summer and celebration of Memorial Day red, white, and blue on through the July 4 holidays, we had some really nice results and again seasonal energy through that period of time.
Fast funded friendly stores we worked really hard over the past several few months, especially and making sure that our blower product, our inventory per foot is down because we’ve uploaded the product better, we have filled the shelves more completely, we’ve cleaned our stock rooms, we’ve done a lot of things to get our stores standing tall when the customer comes and we call it full fun and friendly well stock with a surprising value. We continue to add more frozen and refrigerated Dollar Tree that’s not a new initiative, but we continue to see importance of that.
We continue to look for more well items in our mix as we have in the past bonus buys, special buys, bigger sizes, bigger savings. So it’s sort of the same blueprint, may be different items and different promotions and different focus, but we are going after our customers every need and wish offering the greatest value at a dollar price point at the margin we are willing to accept, and with that we’re successful - have been successful.
It was our 38th consecutive positive comp quarter at Dollar Tree. We think that second half is a great opportunity at Dollar Tree.
Some of the sales momentum that we gained in second quarter that continues into early, early, early into the third quarter, but there is no reason not to believe that we’re not on a wind to our back so to speak as we go into the third quarter. So, I'm real excited and optimistic about the continued growth in our business.
Charles Grom
That's helpful. And then just on the remodels.
I guess you said 111 in the second quarter, I’m wondering when you take a step back, how quickly you think you could roll that out across the entire Family Dollar banner, and can you remind us what the cost is per re model and the associated comp lift that you guys are expecting to receive and/or are receiving?
Bob Sasser
Chuck we're thinking about we like the results we’re seeing it is doing a lot of the good things that we intended when we went out to these stores, and keep in mind these are some of the older stores that in many cases have been touched for many years, and so just from the standpoint of what we can do this year we wrapped it to getting 350 done by the fiscal year. We’re going to hit that blackout window around the holidays where we really don’t to disrupt the stores as we get to having them full holiday merchandise, so we do need to bring the gates down some time towards Halloween, so that we can stay focused on the holiday business.
We will ramp it back up in January and then when we go into next year we will be very bullish on the stores that we want to do for next year and we said we will do 500 a year. It is probably in that neighborhood and I think as we progress through our order stores keep in mind, at some point it is not about fixing the plant facility which we are faced with now, it’s just gaining the adjacencies and layouts done in a better way than we’ve spoken to.
So, we went into this saying that our investment ought to be about a two year payback. We are hitting the ups and downs on that based on how old the store is and what the fiscal plan needs are right now.
If I would say that’s still in the ballpark with how we think about the renovation program over the long run and the best part is, I mean our store teams and our customers come out loving it. And what it does for us for some of the categories that we’ve intentionally put into the store to highlight to impact the shopping trip with our customer.
We can do better, but we like what we see so far and that’s why we’ve opted for this year.
Charles Grom
Great. Thanks and good luck.
Operator
And we do have time for a couple more questions. We will hear from Kelly Halsor with Buckingham Research Group.
Kelly Halsor
Hi, thank you for taking my question. Just had another follow-up on the store organizations, it is good to see you guys, you have bumped up the number of stores you are willing to do this year, how should we be think about that in terms of the modeling kind of how those stores perform within the first year, and kind of overall how much do you think if these continue to be successful, how many do you think that you could pursue on an annual basis?
Thank you.
Gary Philbin
Kelly, Gary. We [indiscernible] saying, I would like to think that we can go in and is there a 500 number you are in the out years after we finished this year's 350 it is probably somewhere in the ballpark as we look forward and the modeling is we like what’s doing on sales on the gross margin accretion because of what we’re doing in the departments, and as much as anything what it does to fix some of our order stores that are usually the most at risk in terms of competition or just our customer not seeing type of shopping environment they’d like.
So, we like what we’re seeing so far, more to come on it. So, we have 111 in Q2 and that will be something that we speak to in every quarter obviously.
Kelly Halsor
All right, thank you very much.
Operator
And our final question today will come from Brad Thomas with KeyBanc Capital Market.
Brad Thomas
Yes thanks good morning and let me add my congratulations as well here. With respect to the same-store sales I was hoping you could just talk a little bit more about how much you think is coming here from your own execution much of which we have talked about this morning versus any changes in the consumer backdrop and the nature of the comparison you are up against here?
Gary Philbin
Well it’s hard to separate to the two there, you know in retail everything is evolving all the time, but I can tell you we are certain that we are seeing improvements based on our synergies and our initiatives, especially in the Family Dollar banner. We have done all those things that we said we were set out to do or we are in the middle of doing them and customers are taking notice and customers are responding to our in-caps, they are responding to our promotions, our digital coupons.
They are responding to all the things that we hope they would respond to that doesn't mean we are perfect. We still are improving and tuning up and responding and changing and evolving with all of those, but it is clear to me that we’re seeing the benefit of greater values and running better stores and our Family Dollar and our customers are responding.
At Dollar Tree, we've had - we just have a model that customers love and everything is a dollar, 10,000 square foot store. Everything is a dollar, you walk and for the things that you need you end up being challenged by things you didn't know that you came for, but the value is so great you just can't pass them up.
So that’s a surprising value, the treasure hunt that merchandise energy and the Dollar Tree stores continues to amaze and delight our customers, as long as we continue to do that I think we have a terrific business. We have been doing in now for 30 years.
So, I think we’ve proven the concept, so it’s always hard to separate, I do feel like - and second quarter somewhere towards the end of the second quarter, especially it felt like the consumer was in a better place and was responding overall with a little more zeal and more robustly I guess that’s not a word, but to our offering. So, whether they are in a better place or whether there is more customer confidence I really can't tell you it’s probably too early to proclaim that, but it did feel like there was some tailwind from a customer perspective and shopping and as I see, other retailers report, retailers reporting good results.
So, I think there is a little bit of both. I am really pleased with what we have done at Family Dollar and what we continue to do with Dollar Tree.
Brad Thomas
Great. And if I could squeeze one last one in on store labor, it feels like you are seeing some return on the investments you’ve made there, as we look out over the next year or so, how are you feeling about the need for potential additional investments in labor?
Gary Philbin
I'm going to keep thinking about labor as an investment and the customer and what does it take to deliver the brand standard. So, right now I think we’re in a pretty good place.
We wanted to make some investments in Dollar Tree, especially to get positioned not only to drive sales now, but position for the great business that we expect coming up in the second half getting ready for the third quarter holidays and the fourth quarter especially. So, we’ve made some investments now in that and it has paid.
We have seen return in the form of sales and sales comp and general customer satisfaction to our stores not only there, but to my satisfaction and our stores as I trial and look can see, I am seeing inventory levels in the stockroom lower, and I am seeing fuller shelves and I am seeing happier customers and so we are going to keep managing our business. In that regard, we’ve always been able to manage that, as well as managing the other lines on the P&L.
If we invest a little more in labor, we’re always looking for where can I take it from to invest. Always thinking about investing in the customer facing part of our business, our stores, and taking it away from the back office portions of our business, and the things that the customer doesn't see.
So, I think if you look at what we have done in the past, I would tell you that we will continue to - business and good will continue to drive that and I think that is what you should expect from us in the third quarter.
Brad Thomas
Very helpful. Thank you so much.
Great.
Operator
And that will conclude today's question-and-answer session. I would like to turn the call back over to Randy Guiler for any additional or closing remarks.
Randy Guiler
Thank you, Michelle. Thank you for joining us for today's call and for your continued interest in Dollar Tree.
Our next quarterly earnings conference call to discuss Q3 results is tentatively scheduled for Tuesday in November 21, 2017. Thank you.
Operator
And that will conclude today's call. We thank you for your participation.