Nov 21, 2017
Executives
Randy Guiler - VP of IR Gary Philbin - Enterprise President Kevin Wampler - CFO
Analysts
Matthew Boss - JPMorgan Dan Wewer - Raymond James Alan Rifkin - BTIG Chris Prykull - Goldman Sachs Scott Ciccarelli - RBC Capital Markets Michael Lasser - UBS Edward Kelly - Wells Fargo Paul Trussell - Deutsche Bank
Operator
Good day and welcome to the Dollar Tree Inc. Third Quarter Earnings Conference Call.
Today's conference is being recorded. At this time, I’d like to turn the conference over to Mr.
Randy Guiler, Vice President, Investor Relations. Please go ahead.
Randy Guiler
Thank you, Matt. Good morning and welcome to our conference call to discuss Dollar Tree’s performance for the third fiscal quarter of 2017.
Participating on today’s call will be our President and CEO, Gary Philbin and our CFO, Kevin Wampler. Before we begin, I would like to remind everyone that various remarks that we will make about future expectations, plans and prospects for the company constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors included in our most recent press release, our 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 if necessary.
Now I will turn the call over to Gary Philbin, Dollar Tree’s President and Chief Executive Officer.
Gary Philbin
Thank you, Randy. And good morning everyone.
This morning we announced our results for the third quarter of fiscal 2017, sales increased 6.3% to $5.32 billion. Our same-store sales increased 3.2% by segment comp sales for the Dollar Tree banner increased 5% and for the Family Dollar banner comp sales increased 1.5%.
Our gross margin rate improved 90 basis points to 31.3%, operating income increased 24.2% to $425.2 million and our operating margin rate improved 120 basis points to 8%. Earnings per share increased 40.3% to $1.01.
I’m really pleased with the terrific third quarter our team delivered with the performance of each of our business segments, the Dollar Tree banner delivered a 5% comp, it’s best quarterly comp since Q4 of 2014 along with 20 basis point improvement in its sector leading operating margin. The Family Dollar banner delivered positive same store sales of 1.5% and 190 basis point improvement in operating margin as we continue to gain traction in the business.
Our Dollar Tree Canada team delivered another solid quarter of strong sales coupled with improved margins and expense control and our Dollar Tree direct business while a small portion of our business delivered low double-digit comp increases in both sales and visits to the sites. Dollar Tree highlights for the quarter include, our top performing categories for the quarter were snacks and beverage, food, household products, healthcare and stationary.
Sales performance was led by discretionary as we delivered one of our best seasonal quarters in years, both consumables and discretionary comp did better than 4% for the quarter. All three months comp positively in the quarter, September was the strongest month in the quarter and geographically Dollar Tree same store sales growth was strongest in the Southwest, Northeast and Midwest and all of our zones delivered positive comps greater than 3%.
Elements of Dollar Tree strong seasonal performance included Halloween as we delivered strong comp sales and improved seasonal inventory sell through greater than prior year’s quarter, Fall Harvest also delivered solid comps during the quarter and inventory was well positioned as we entered the fourth quarter. Back-to-school was our best season in several years, and Christmas while it represents a small portion of Q3 as we received early inventory of our Christmas craft in early Day Core items.
Our initial results were very encouraging. Dollar Tree continues to be strong, consistent and growing, this represent our 39th consecutive quarter of positive same store sales and operating margin continues to lead the value sector.
Our third quarter performance again validates the relevance of the Dollar Tree brand, customers love our fixed price concept and continue to shop for value and convenience. We are very pleased with the traffic and sales results, our merchandize assortment and flow of inventory.
Our business model continues to focus on customers wants and needs and it is a different shopping experience from the rest of retail. For the Family Dollar segment, the highlight for the quarter include top performing categories were snacks and beverage, refrigerated product, school and office supplies, and bedding.
Our comp performance was driven by consumables. And sales cadence for the quarter were relatively balanced -- the quarter -- were balanced throughout the quarter with each month above 1% comp.
September was the strongest comp of the quarter. Geographically, Family Dollar same-store sales growth for the quarter was strongest in our West, Mid Atlantic and Northeast zones.
Importantly, all eight major geographic zones delivered positive same-store sales for the quarter. We continue to make meaningful progress at Family Dollar around the key foundational elements that will drive enhanced performance, improving the store table stakes, focusing on merchandising value for the customer, and consolidating of shared services.
Evidence of our progress can be seen in our third quarter results, positive 1.5% same-store sales, 130 basis point improvement in gross margin, and 60 basis point SG&A leverage, and a total of a 190-basis point increase in operating margin. Feedback we are receiving from our Family Dollar shoppers indicate they are seeing cleaner stores, greater values on the items our customers buy most often, improving product assortments, more consistent in-stocks, and better customer service in our stores.
We want to be the neighbourhood store of choice for the fill-in shopping needs of our Family Dollar customers that typically live, work, and shop near our stores. During the third quarter, we completed another 191 Family Dollar store innovations as part of our renovation initiative.
We continue to be very pleased with the initial results we are seeing in these stores and especially about the feedback we are receiving from our customers and store teams. Our target for fiscal 2017 is 350 stores and we will continue to renovate hundreds of older Family Dollar stores as we improve the business.
Elements of the improved store layout include better adjacencies and more productive end caps, expanded beverage and snack, including immediate consumption coolers near checkout, headed assortment of food and coolers and freezers, updated air care assortments, expanded adult beverage in some stores, our shopper-friendly power alley to promote Dollar well items, and a faster checkout process for our customers. Additionally, we continue to make progress as planned with elevating our private brand assortment in stores.
These private brands are being developed to provide national brand comparable quality and terrific values to support the compare and save component of our smart ways to save program. Each of our brands will contain a 100% customer satisfaction guarantee.
These brand improvements are taking place across the store and are already impacting performance in household products, candy, snack and beverage, hardware, vitamins and others. Examples of some of the new private brand labels you will see in Family Dollar, include Catawba Candy, Beats, [plus], Chestnut Hill in our food selection, Nature's Measure and Family Wellness in our health and beauty category, Home Line and Driver's Choice in our household products and Tool Bench in our home assortment.
Highlights for the quarter at Dollar Tree Canada included the fact that our stores are delivering better day-in day-out standards resulting in sales across all departments with encouraging growth on the discretionary side of the business. Top performing categories included home décor, party celebrations, stationary and health and beauty care.
On the seasonal side of Dollar Tree Canada business in Q3 are back-to-school, Harvest and Halloween programs all showed nice year-over-year improvements in both comps and inventory sell through. Our efforts to train retain and develop our store teams are showing up with better top line sales and bottom line performance store-by-store.
We opened two new stores in Canada bringing our total Canadian stores to 226. For Dollar Tree direct, the digital division of Dollar Tree is providing an opportunity to broaden our customer base, drive incremental sales, expand brand awareness and attract more customers into our stores.
A few highlights of our Dollar Tree Direct business. We had another productive and profitable quarter as we experienced low double-digit increases in sales and traffic.
We are seeing a continued increase in customers visiting dollartree.com from their mobile devices. Our third quarter marketing was heavily focused on back-to-school and back-to-campus with a goal to drive both in-store and online traffic and sales.
Our customer engagement at dollartree.com continues to help and create activities and holiday themes that are shared across, Facebook, Pinterest, Blog Post and we continue to use many of our how to videos as an extremely effective digital marketing medium for Dollar Tree. These videos are placed on our website as well as various marketing channels such as email, Facebook, Pinterest, blog post.
I encourage you to review our sites for yourself at dollartree.com and familydollar.com. Now, looking at real estate in the third quarter, we opened a total of 169 new stores, 99 Dollar Tree and 70 Family Dollars.
We relocated or expanded 23 stores, 19 Dollar Trees and four Family Dollars. We’ve renovated a 191 Family Dollar stores as part of our renovation initiatives for a total of 383 projects during the quarter.
We also have freezers and coolers into our 125 Dollar Tree stores during the third quarter bringing our total of Dollar Tree’s stores of freezers and coolers now to 5,133 stores. And during the quarter we closed six stores one Dollar Tree and five Family Dollars.
We ended the quarter with 14,744 stores, 6,604 were Dollar Trees, 8,140 Family Dollar banner. Overall, we were really pleased with our results through the business and are enthusiastic about the opportunities ahead of us.
I’ll now turn the call over to Kevin to provide more detail on the third quarter performance and our outlook for the remainder of our fiscal year. Kevin?
Kevin Wampler
Thanks, Gary and good morning. Total sales for the third quarter grew 6.3% to $5.32 billion, Dollar Tree segment total sales increased 8.8% to $2.69 million and Family Dollar segment total sales increased 3.8% to $2.63 billion.
Enterprise same store sales increased 3.2% on a constant currency basis or 3.3% when adjusted for Canadian currency fluctuations. On a segment basis, same store sales for the Dollar Tree banner increased 5% or 5.2% when adjusted for currency fluctuations and the Family Dollar banner increased 1.5%.
Gross profit for the combined organization increased 9.6% to $1.67 billion for the third quarter of 2017 compared to the prior year's quarter. As a percent of sales, gross profit margin improved 90 basis points to 31.3% versus 30.4% in the prior year's quarter.
Gross profit margin for the Dollar Tree segment was 35.1% for the third quarter, a 30-basis point improvement compared with prior year’s third quarter. Factors impacting the segment's gross margin performance during the quarter included lower occupancy cost due to the leverage from the comp sales gain and lower merchandise costs based on improved markdowns.
Gross profit margin for the Family Dollar segment was 27.5% during the third quarter compared with 26.2% in the comparable prior year period. The 130-basis point improvement was primarily due to lower merchandise cost, lower markdowns, and distribution costs.
Consolidated selling, general and administrative expenses as a percentage of net sales in the quarter improved 30 basis points to 23.3% from 23.6% in the same quarter last year. Third quarter SG&A expense for the Dollar Tree segment as a percentage of sales increased 10 basis points to 23.3%, compared to the prior year's quarter of 23.2%.
Higher store payroll cost, incentive compensation, and lower other income were mostly offset by lower utilities and depreciation as a percentage of sales. SG&A expense for the Family Dollar segment as a percentage of sales was 23.4% compared to 24% in the prior year's quarter.
The 60-basis point improvement was a result of lower depreciation cost, lower workers’ compensation cost, lower payroll cost related to the harmonization of vacation policies and lower health insurance, utilities and debit and credit card fees, partially offset by higher expenses primarily related to incentive comp, repairs and maintenance, store supplies, advertising and legal fees. Operating income for the enterprise increased to $425.2 million compared with $342.4 million in the same period last year.
Operating income margin improved 120 basis points to 8% for the quarter from 6.8% in last year’s third quarter. Operating income margin for the Dollar Tree segment improved 20 basis points to 11.8% when compared to the prior year’s quarter.
Operating income for the Family Dollar segment increased $51.5 million to $107.9 million, a 190-basis point improvement as a percentage of sales when compared to the prior year's quarter. Non-operating expenses for the quarter totalled $70.1 million, which was comprised primarily of net interest expense.
Our effective tax rate for the third quarter was 32.4% compared to 25.5% in the prior year's quarter. The prior year’s third quarter included a one-time tax benefit of $21.4 million or $0.09 per share related to a 1% decrease in North Carolina’s state tax rate, which decreased the deferred tax liability related to the trade name intangible assets.
For the third quarter, the company had net income of $239.9 million or $1.01 per diluted share compared to the reported net income of $171.6 million or $0.72 per diluted share in the prior year's quarter. As a reminder, last year’s Q3 reported earnings of $0.72 per share included both a $0.09 benefit related to the tax rates I just mentioned and a $0.09 charge related to debt refinancing costs.
Looking at the balance sheet, combined cash and cash equivalence at quarter end totalled $400.1 million compared to $866.4 million at the end of fiscal 2016. Our outstanding debt is approximately $5.8 billion a decrease of $1.4 billion from the end of the third quarter of 2016.
Company continues to focus on its stated goal of returning to investment grade with step rating, we expect our rent adjusted debt to EBITDA ratio to be below 3.5 times at fiscal yearend. Inventory for the Dollar Tree segment at quarter end decreased 2% from the same time last year while square footage increased 4.6%.
Inventory for selling square foot decreased 6.3%. We believe that current inventory levels are appropriate to support scheduled new store openings and our sales initiatives for the fourth quarter.
Inventory for the Family Dollar segment at quarter end increased 9.2% from the same period last year and increased 6.9% on a selling square foot basis. We are pleased with the progress we’re seeing in our in-stock levels on key items, we are continuing to review merchandize assortments and we believe our current inventory levels are appropriate for the fourth quarter.
Capital expenditures were $177.7 million in the third quarter of 2017 versus $95.6 million in the third quarter of last year. For fiscal 2017, we are planning for consolidated capital expenditures to range from $680 million to $700 million.
Capital expenditure will be focused on new stores and remodels along with the renovation of 350 Family Dollar stores. The company now expects to complete approximately 1,080 store projects in fiscal 2017 an increase of 65 for the beginning of the year.
The increase is driven by approximately 100 additional Family Dollar renovations, net of approximately 30 less new Dollar Tree stores in 2017. In addition, CapEx includes the addition of frozen refrigerated capability to a total 400 new and existing Dollar Tree stores, expansion of frozen and refrigerated for 300 Family Dollar stores.
IT system enhancement and integration projects and the initial phases of construction of a new Dollar Tree banner distribution center in Warrensburg Missouri and our store -- our Chesapeake store support center expansion. Depreciation and amortization totalled $149.4 million for the third quarter, depreciation and amortization expense was $157.6 million in the third 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.
Fiscal 2017 includes a 53 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 state's increasing minimum wages and general average hourly rate increases.
We have budgeted higher import freight cost and diesel cost than a year ago. Net interest expense will be approximately $74 million in our 14-week Q4.
For Q4, non-operating income will include $7.4 million or $0.02 per share of asset for recognition of the completion of all the requirements for the forgettable promissory note issued by the State of Connecticut for the construction of our winter Connecticut distribution center in 2012. Our guidance does not include any share repurchases, we cannot predict future currency fluctuations, we’ve not adjusted our guidance for changes in currency rates.
Our guidance also assumes a tax rate of 36.2% for the fourth quarter and 34.7% for fiscal 2017. Weighted average diluted share counts are assumed to be 238.1 million shares for Q4 and 237.7 million shares for the full year.
For the fourth quarter, which includes one extra week, we are forecasting total sales to range from $6.32 billion to $6.43 billion and diluted earnings per share in the range of $1.80 to $1.89. These estimates are based on a low single-digit same-store sales increase and year-over-year square footage growth of 3.7%.
For fiscal 2017, we’re now forecasting total sales to range between $22.2 billion and $22.31 billion, compared to the company's previously expected range of $22.07 billion to $22.28 billion. The company now anticipates diluted earnings per share for fiscal 2017 will range between $4.64 and $4.73, which includes $53.5 million or $0.14 per diluted share of receivable impairment charges.
These estimates are based on a low single-digit same-store sales increase and 3.7% square footage growth, and inclusive of benefit of the 53rd week occurring in Q4 of fiscal 2017. I’ll turn the call back over to Gary.
Gary Philbin
Thank you, Kevin. We are very proud of the results that our teams delivered across our nearly 15,000 stores.
Our merchants have teed up an exciting holiday experience at Dollar Tree and Family Dollar. Our supply chain teams have worked hard to deliver holiday goods with two major hurricanes affecting our normal business routines.
And our store operators are now prepared for the biggest most exciting six weeks in our retail year. The retail environment ever changing provides both banners opportunities to take advantage of our customers’ wants and needs and our management team has demonstrated over the years ability to be nimble and delivering results when challenged by the external environment.
At each of our business segments we are focused to deliver on our customers’ needs, our initiatives at both banners have helped to deliver on sales, margins, expense control and ultimately customer satisfaction. We are proud of what we have achieved and look forward to energy [ph] around the remaining major holidays ahead of us.
Before we turn the call over to Q&A I would like to share a few comments on the recent. As you all know late August throughout September states of Texas, Louisiana, Florida were hit by hurricanes Harvey and Irma.
Many of our store associates and customers were personally affected by these storms. Our efforts have been to help our Dollar Tree and Family Dollar associates and help the impacted communities through our partnership with the Red Cross.
I want to give a special shot on and thanks to the thousands of associates at both Dollar Tree and our Family Dollar banners who worked tirelessly to have their stores open and serve their customers and preparation for and recovery from these devastating weather events. Across both banners we saw great team work, passion, dedication throughout our organization.
My personal thanks for all of the efforts made in the stores, distribution centers and support centers and our many vendor partners that enabled us to get the impacted stores up and running in the hours and days after the storms impact. Operator, we are now ready for questions.
Operator
[Operator Instructions] And your first question will come from Matthew Boss with JPMorgan.
Matthew Boss
So, can you speak to gross margins drivers at the Family Dollar banner? Obviously, a great quarter, but specifically can you talk to customer reception to the recent rollout of some of your private brands there.
And just how would you rank forward gross margin drivers at FDL?
Gary Philbin
Well, I’d it’s a lot of the elements that we’ve been talking about Matt from the beginning at core, some of it’s the initial steps on synergy between the banners both on direct consumer items. The smart way is the save program that we’ve implemented from the beginning has given the ability to drive business across each of those metrics.
So, [with our dollar well] which certainly gives us some ability to drive higher margin items and we know how to do that from another banner. The compare and save on the private brands has really been, I would say just at the beginning stages of that now you’re starting to see some of those brands out there in each of the categories.
I mentioned some of them but I would say at this point the primary impact has been across consumables both in food and some of our household products. And where we’re introducing those and getting critical mass, we’re seeing additional penetration growth on the consumable side of the label change.
I think it just gives our customers greater confidence in the packaging, marketing of the brands itself is more geared towards each of the categories that we operate in whether it’s center of the store food or beverage or household products and it gives our customers I think the confidence to buy what are great values on the shelf compared to national brand. And this isn’t either/or we want to do both and so our opportunity to enhance the packaging has been a big piece of that.
I would tell you there has also been just the nuts and bolts of us getting our pricing in line we’re more competitive than two years ago. Our customers have greater confidence on the retails on the shelf, it still means that we have promotion on the items that we buy most often.
And I would say our smart way to save element of our Family Dollar business also now has been well received and during the quarter we did start a new app, Family Dollar that gives our customers easy access to some of the great savings. And while we're at the beginning stages of getting our customer base there, what it allows us to do is really touch the customers who buy week-in and week-out most often and provide them savings on the items they buy most often.
And so, it’s the combination of all those things that have been driving margin and the continued emphasis on private label, driving discretionary, driving more imports, all those things that we’ve talked about from day one are all the pieces that continue to drive progress at the Family Dollar level, both on sales and margin.
Matthew Boss
That’s great. And then just a follow up Gary and more higher level.
How would you speak to the health at the low end? We seem to be seeing some laterals even outside of the Dollar store segments and judging by the trends that you’re seeing in discretionary and I think you decided the best in the long time there.
Are you starting to see any signs of some wallet openings? Just best way to characterize what you’re seeing out there with your core customer and do you think it’s sustainable?
Gary Philbin
I think I would answer it two ways, Matt. I think on one side it’s just us executing better.
And that speaks to first of the month and getting our stores ready and in-store execution on all the store table stakes. So, at a very high level lets go get our fair share.
And I think I’ve mentioned before we have seen the increase of EBT benefits at Family Dollar even though across country they are down, small portion of our center type but still I think it speaks to just having the confidence when our customers come in at the most important time of the month, and that’s at the beginning. I would say I think there’s a customer that’s still is under pressure.
Rents continue to rise. Healthcare continues to rise.
We have to be right on when they have money in their pocket we call it thrive and survive. So certainly, at the beginning of the month for our most needy customers we need to be ready in store with the basics.
And at the end of month, given the right choices on the items that continue to give them a reason to come and shop at the end of the month when they are trying to stretch their budget. So, we got to stay focused on that customer who might have a little more jingle in their pocket but we have got to be grounded on everyday great retails and they got to have confidence that we are in stock with them in store.
So, it’s a combination of doing both those things.
Operator
[Operator Instructions] And we will now move to Dan Wewer with Raymond James.
Dan Wewer
Gary, first question regarding the Dollar Tree segment. Can you discuss kind of comp sales benefits you’re now getting from the re-banners at Family Dollar and Deals stores?
And then further with operating margin for the Dollar Tree segment now at lifetime high, what kind of headwind for improvement remains given this is a discount and not a specialty retailer?
Gary Philbin
I am honoured to be considered as specialty retailer but I think it’s two pieces I think are driving the results for us Dan. Upside on operating margin, we are very proud of the results.
I would say it’s driven right now because of just the ability for us to get smarter across each of our store clusters. Our merchants have done a terrific job on the values.
I’m not speaking to anything that’s new to this business but our ability for our merchant teams to create value has always been the focus. That has to be worth more than the Dollar.
And when we really hit it right we shared it across all of our stores and all customer types that come into the stores. And I think we’re most proud of our ability to do that day-in day-out.
But when you get to the holidays, that’s really our time to shine. And so, there’s always upside.
We are never completely satisfied how we go through all the seasons. We see the ability to do a little bit more as we do the post mortems on each of the holidays and I think our opportunity to just continue do a little bit better as we drive our initiatives around -- some are around sales, some are around margin, some of course are always around SG&A, I think those are the buildings blocks for us to say how do we continue to drive incremental margin.
And give me a repeat on the first question Dan? The re-banner, yes.
Dan Wewer
The same-store sales benefit from the re-banners.
Gary Philbin
Because I think in the background of our comp store sales we’ve had 300 Family Dollar re-bannered to Dollar Tree, we’ve had over 200 deals get re-bannered really from 2015 and 2016 on both those, along the way we’ve had 200 more Dollar Tree re-lows [ph]. And initially the impact is one of cannibalization and we’re pleased with the comps we’re getting now and it’s a combination of a couple of things.
Just getting store managers in the seats that go through our holiday seasons, because it is different and you have to know how it’s going to flow from season-to-season. And so, our focus is more granted there, it also allowed our real estate teams to figure out on our pipeline, where should the next store go, because we were putting some stores in some geography that we already had plans for.
So, we’re pleased with what that’s doing for us both on the Family Dollar side and deals side, it’s fixed to both customers also by the way we had $11 or deal stores convert to Family Dollar which while not as big also are producing nice comps for us in the Family Dollar side. So, there is certainly both an engine for us right now as we go through comps in 2017.
Dan Wewer
Also, I just had a really quick follow up for Kevin. You noted that your net debt EBITDA rate drops to 3.5 by year-end.
Do you think that will be sufficient for the company to regain and investment grade rating? And if so what would be the benefits for your operations and financials from regaining the investment rating?
Kevin Wampler
Yeah. I mean from day one, the day we announced this acquisition we’ve stated the fact that our goal is to get back to investment grade.
And as always, we think about it from a flexibility standpoint as being investment grade gives us more flexibility in the financing world at the end of the day. Obviously, we’re on that track, we obviously will work with the rating agencies, we’ll provide updates to them [Audio Gap] whether they decide to upgrade or not, but I think we’re doing our part of the equation so to speak.
So, we’ll continue for with that, but obviously the flexibility in the marketplace and the potential to see lower interest rates as investment grade as opposed to speculative [ph]. So, those are things we look at.
Operator
Next, you’ll hear from Alan Rifkin with BTIG.
Alan Rifkin
Okay. Yes, I’ll add my congratulations as well.
On the Family Dollar side, certainly your gross margin gains are very admirable. But going forward, would you sacrifice some of the gross margins gains for a higher comp?
Gary Philbin
Well, we try to do both with everything we know going into the quarter and it’s a combination of really understanding where we are in the marketplace and the competitive sets. We obviously like everyone else understand what’s going on with pricing out in each of the markets that we operate in.
We do have our own pricing strategy and competitive set on our promotional activity. We can always do more Alan and I would say even with the 1.5 that we produced, we certainly saw opportunities during the quarter that we could better.
Everything that we know right now baked into the forecast the magic here is continuing to drive improvement across all those. It’s not just comp store sales.
It’s not just gross margin improvement. It’s not just SG&A.
We talk about each of them and we get down to the details. So, when there’s an opportunity for us to drive business, we try to take advantage of it.
We try to back that up with how do deliver margin and SG&A. What I am pleased with the Family Dollar team, we’ve really had a great growth on just the opportunity to really focus on what our Family Dollar customer and what they buy most often.
Shows up in the ads of course but it’s also showing up on our everyday retails on the shelf and it also shows up with our Family Dollar app. So, if it’s a mom who buys diapers, we can deliver something above and beyond to them.
And that speaks to us getting to know that Family Dollar customer better. We have more stores in urban America than anyone else.
I think it speaks to us knowing our customer better than anyone else in the arenas that we compete in. And executing on the store level is the other side of that.
And so, it’s all those things that go into driving that comp combined with how do we deliver bottom -- and bottom-line Alan.
Alan Rifkin
Okay. Thank you very much.
And a follow-up if I may, was there any benefit or impact both to revenues or operating margins with respect to the FLSA implementation or the SNAP implementation or inflation or deflation within commodity products?
Gary Philbin
Well the FLSA of course started off and then stopped last year in December so about this time last year we were talking about it and then it was pushed off to front burner. And SNAP benefits, I think across the country there's less households participating in it.
But as I said before I think our opportunity at Family Dollar is getting our fair share of that and I am pleased that we’ve been able to increase our penetration on the quarter year-over-year and that just speaks to our ability to do more around for some month again ready for it. And what was the third point?
Your -- we’re cycling some of the commodity I would say in our world you see some of it in diary, probably eggs is the biggest one right now where we’ve had a boom bust cycle now on eggs going back and forth. But we’re not a grocery store, we’re not in the same arena as that.
And so, it doesn’t impact us as much as the folks in that sector. And again, for us going into this fourth quarter our opportunity is now for both banners, is around the discretionary side.
But we’ve really got some great values both on the Dollar Tree and Family Dollar side to drive our business for Q4. So, teams have done a nice job getting focused on that and delivering it into the stores and we got the five to six biggest weeks ahead of us now to deliver on that.
Operator
And we will now go to Chris Prykull with Goldman Sachs.
Chris Prykull
Just wanted to talk about the free cash flow generation of the business a little bit, particularly as we continue to progress further through the Family Dollar integration. How should we think about CapEx in fiscal ‘18 and beyond and how are you thinking about the timing for potential resumption of the share buyback program?
Kevin Wampler
Yeah, Chris as we look obviously we’re rolling into our budget planning for 2018. Obviously, we’ll give full view of guidance and CapEx next quarter, with the next quarter report.
But I would tell you that CapEx we’re going to continue to grow, we’ll have some various from the store standpoint and infrastructure standpoint. So, I would not expect CapEx to be less than it is this year and in fact it’s probably going to grow a little bit as we sit here today and again we’ll give you more color on that as we go forward.
But I think free cash flow is important, obviously it ties into everything we’re doing as far as paying back our debt. And as we look at our longer-term once we get back to investment grade and that gives us stability to relook at our capital structure and consider other things that have been important pieces of the way to look to using cash in our past.
So, as we go forward, I think we’ll continue to generate significant free cash flow, puts us in a very good flexible place going forward.
Chris Prykull
Great. That’s helpful.
And then one follows up as you look sort of past the Family Dollar integration longer-term. How should we think about the core earnings growth algorithm for the business at that point in time?
Is it fair to think about it in a similar fashion to what you all used to deliver before the acquisition?
Kevin Wampler
I don’t know that we’ve ever had any algorithm that we’ve referred to in regards I mean the main thing is we’ve put our guidance together, we’re always looking to improve our business. We’re always looking to grow sales, grow comp sales, grow our store base, grows our profitability which has been one of the hallmarks of the Dollar Tree brand continuing to work to increase that operating margin.
And again, each and every year provides a different set of circumstances and as we’ve went through the year, we’ve faced different things sometime there is inflation or deflation in the product cost that can be increases and decreases in fuel and obviously labour is a component that we continue grow forward and look at the that the labour markets. So, all those things play in to it and so our view point is -- our job as management is to come with a plan that will continue to improve our business as we go forward.
But things that are really increasing, we have to determine ways that we can become more efficient, we have to improve our processes, we have to improve the way we go to market, everything we do, the way we supply our stores. So, all those are always in the back of our mind and we build initiatives around them to move our business forward each and every year.
So, I don’t know that there is an algorithm other than the expectations for growth and as we go forward that’s the way we think about it.
Gary Philbin
And Chris I would just add my color to it. I think both Dollar Tree and Family Dollar we are a company that’s going to grow hundreds of stores each year when other retailers are potentially pulling back, I think it’s still a great opportunity for us to deliver value and convenience in this value sector, which I think is the place to be for both of our brands and the initiatives that we have around driving productivity by store, by category will remain foundational elements of us.
And we will be something different long-term than we are now with additional categories that come into the store and create excitement. We’ve always done that over the years from what we’re small boxes in the malls to something that delivers on both basics and at one’s end needs for our customers at Dollar Tree and we’re at the beginning stages of that at Family Dollar with renovations, improving productivity, changing the shopping experience.
So those are just some of the elements that I think will continue to drive upward momentum on our sales as we look into future.
Operator
And we do have time for a few more questions. Next, we will go to Scott Ciccarelli with RBC Capital Markets.
Scott Ciccarelli
So, we know you guys had to make some sizable investments as part of the acquisition of Family Dollar both in the CapEx side as well as the expense side. Can you help us better understand kind of where you stand today in that investment spending process and may be quantify how much more spending still needs to happen, now that we’re two years through the integration process?
Kevin Wampler
Yes, Scott I think as we look at it we talked about synergies, we’ve talked about the cost to achieve synergies and the fact that we have -- we originally said approximately $300 million of cost to achieve synergies and we’ve said that there’s been over 50% of those costs have been CapEx, and a lot of that’s related to the re-bannering of stores as well as the looking at systems and making changes and so forth. So, most of that is behind us.
There will be some continued systems work as we go forward. The other big area that we continue to invest in is in regards to deferred maintenance especially within the red banner.
And I think practically every quarter since the close of the acquisition you’ve probably heard me say that one of the SG&A items at the top is repairs and maintenance. We continue to look at that.
We still believe we have things that we want to continue to do to improve the Family Dollar stores from a repair and maintenance standpoint. Again, it’s part of our table stakes that goes hand-in-hand.
So, there will be continued investment but I don’t -- it's always built into our guidance as we go forward for those expenses. And from a capital side, that would be within our guidance as well.
So, I don’t see it as being out of the normal, it's somewhat part of the run rate as we go forward. And I don’t see a big blip on the go forward map so to speak, it's going to be surprise investment there.
But there will be continued investment going forward.
Scott Ciccarelli
Okay. And what else would be kind of follow-on to that, operating expense that may still need to kind of flow through the P&L.
Is there anything notable in there?
Kevin Wampler
Other things there could be some consulting dollars as we -- especially as we work through some of the system type things, sometimes we need to bring in some consulting help and those type of initiatives. So that’s probably one of the main areas.
Operator
And our next question comes from Michael Lasser with UBS.
Michael Lasser
It’s on the remodel Family Dollar stores. What sort of productivity and profit lift are you seeing in the remodels that you have done initially?
Gary Philbin
Hey Michael it’s Gary. We are pleased with that.
We have not called it out as the circle continues to see grow and the number of stores we are going to affect up to 350 this year. I think the primary elements of the revalue or renovation that you heard me talk about, really speak to what the customers sees and part of that is just adjacencies of product, it’s introducing more dollar well, it’s adding some more items that they need especially in frozen food assortment, it’s similar to surprise and delight of the power alley and well.
It’s more Dollar items throughout the store. And it’s really giving our customers.
I think a fantastic shopping experience and one that invites them to spend more in the store just because some of the items and one of the basics we have diapers, next to our kids' new born infant toddler where and the synergy of having a mom shop both of those is obvious. So, those are some of the things that store ought to deliver for us.
As we continue to do more renovations, we’re looking at some of the older stores in the fleet what we would call traditional stores and opportunity to bring them up to a brand standard and the expectation is that we can drive a pay back on this that meets all of our internal requirements on it. So, we like where we’re at, we’re going to plan to do the remaining of the stores in January to get it up to 350 for this year and we’re going to certainly be doing hundreds of them next year to continue to drive the progress forward.
So, more to come on it, we like what we see and it’s a great opportunity for our customers to see really a new Family Dollar inside the four walls and invite them in to see a new shopping experience.
Michael Lasser
And as part of the remodels that you’re doing you’re adding more coolers and freezers, so presumably that's adding more customer trips and more sales volume is that right?
Gary Philbin
We like that, now not every store has exactly the same number of coolers and freezers and some get more than others, some have the right configuration, but you’re exactly right especially in frozen food, our customer can store that in a two-by-three section at home of the refrigerator and freezer. It does invite more trips, it also I think gives them some of the basics that they need every day so it does we think drive traffic, we certainly saw it on the Dollar Tree side as our expanded frozen food years ago and continue to.
And I think it speaks to category that our customer needs.
Michael Lasser
And then my follow up question is on the fourth quarter guidance. The 3.3% out of price comp in 3Q presumably under your nomenclature that’s a low to mid-single-digit comp and that you’re guiding for low single-digit comp in 4Q.
Is there any reason to believe why the business should flow in 4Q versus 3Q?
Kevin Wampler
Michael, out of store put our guidance together what the other thing we know we’re obviously early in the quarter we’re three weeks in of a 14-week quarter, we got the six biggest weeks ahead of us. It doesn’t mean we believe it’s going to flow and we’re very encouraged with our business in the third quarter was very encouraging.
We feel very good about our inventory position where we’re at and the flow of our goods as we look at the fourth quarter. So, like those are all very, very encouraging things.
And we still got to go out and execute it at the end of the day and so we put what we know and what we believe in and we can hit, we hope to hit basically in the fourth quarter and then go forward from there. And obviously our goal is always to overachieve and that’s what we work to do.
Gary Philbin
And I would just add the -- against that backdrop is really just the merchandise energy because when it comes right down to it, we’ve got to get the right product to the right stores. But it also has to speak to the values that our customers will see in store.
I always think what the merchant teams have done on both banners to drive the surprise and delight that you need sprinkled under both banners this time of the year is in place. And our store teams have worked hard.
But to Kevin’s point, we are ahead of even Thanksgiving this week. So, the most exciting six weeks in retail are in stores called Dollar Tree and Family Dollar I think.
We are geared up and ready for it. And now we have to go execute.
Operator
And our next question is from Edward Kelly with Wells Fargo.
Edward Kelly
Could you just go back to Family Dollar for a minute here? So, the margins obviously were great.
The progress on the top-line continues to be I guess I would characterize it as slow. Could you may be just provide a little bit more color on what you see as the key hurdles at this point to driving better comps there, the initiatives that you’ve got to get over those hurdles and as we sort of think about progressing forward, not just Q4 but even into next year, what type of progress are you looking for internally to tell you that you’re getting traction?
Gary Philbin
I am pleased with the results to say we can always do better as what we are all about so it’s just part of our nature. Yes, we think we can do better.
I would just call out though in Q3 we’re living [ph] some of the echo from the boom of our clearance event back in Q3 of 2015 where we really cleared out the old merchandise at Family Dollar, drove lots of footsteps in sales in the quarter. And so, it was may be a bit of aberration because of the spending we did to clean up the stores of old merchandise and resonated well with our customers.
So, part of our comp last year was obviously going against that. So, year-over-year if you take a look at the two-year stack but then take a look at the three year, I think it might tell a better story, at least it does to us internally as we view the business.
Nevertheless, we continue to work on at Family Dollar is driving a consistent comp top-line. We think it’s there.
But we think it’s there by doing the things we’ve been talking about. The tables stakes we’ll continue to address what our customer sees primarily around in-stocks and customer service, getting ready for first of month, having the right item at the right time.
All the things we have been doing on private label to drive the value of the items, the renovations. We need those.
We’ve got a couple hundred a day, we will get to 350 by year end. But addresses the stores that are I think to some degree our biggest opportunity to drive comps and most at risk if we don’t just because then tend to be order and the adjacencies aren’t right.
So, it’s never one thing. It’s all these foundational elements that we’ve been working on from the beginning that start to show up in comp store sales.
That’s what Duncan and team, merchants, operators at Family Dollar are focused on every day. And so, over the long-term this will be something that we continue to work on, address, and deliver top-line and bottom line results on.
Operator
And we do have time for one final question. We will hear from Paul Trussell with Deutsche Bank.
Paul Trussell
Good morning. I wanted to touch on a number of factors that are impacting margins both this past quarter and how we should think about it moving forward.
If you can just detail a bit the pricing and promotional environment as well as payroll and labour cost. And then Kevin you also mentioned I believe incremental hurdles to be faced on diesel and freight.
If you can just touch on each of those factors both in terms of third quarter and going forward. Thanks.
Gary Philbin
I’d like Kevin take a start and I’ll do the follow up Paul.
A –Kevin Wampler
Yeah. So obviously if you look at labour we’ve said from the beginning of the year that we expect that there to be pressure on our store labour and to no surprise given the various states that have now set their own specific minimum wages as well as just the general pressure from an increase in average hourly rate probably the we’re seeing the largest increase probably since pre-the great recession basically at this point in time.
But, so obviously we expected that and built that into our model as we entered the year. And again, we look at the labour markets and we are competitive and the individual market demand we look at them in that direction.
And feel pretty good about where we’re at overall and but again it will continue to be a pressure as we go forward and it’s built into our guidance. Obviously, diesel is roughly I want to say about $0.50 higher per gallon than it was a year ago at this point in time.
I think for the third quarter itself it was closer to maybe a $0.30 to $0.40 average higher, so there is a little bit of headwind there as well as from ocean freight as we talked about with the contract started in May, as freight rates came up a little bit. So, that’s been in our guidance all the year as we go forward, we’ll have to see how we look at that one as we go into the next year that may continue to be a little bit of put pressure there as there have been some additional consolidation in the ocean freight carriers and there has been even some consolidation obviously in domestic freight carriers as well.
So, we’ll continue to look at those things. But again, we always look at on Paul as things that we know we see them coming, we have to react accordingly and determine how we can offset them in some way shape or form whether it’s a changes in how we operate or finding other line items where we can offset those costs increases if they happen to be cost increases.
So that hasn’t changed as part of our DNA so where we think about things as we go forward. But again, all the things are built into our guidance as we go forward.
Gary Philbin
And I would just add as we enter the holiday season here, really on the pricing and promotional piece, I’m pleased to where we are on our everyday values on the shelf across all of Smart Ways to Save that we offer our customer. I think our opportunity as we look forward into the holiday, we have some great promotional activity plan that Family Dollar at Dollar Tree, everything is a dollar, but the values are better than ever come and get it.
But at Family Dollar, I think we’re going to have a great holiday season based on what we see in the marketplace today. The values that we have out there, the assortment and offering we have out there I think is going to resonate with our customers.
And I think we are geared up at Family Dollar to have a great fourth quarter. Dollar Tree, our seasonal, our store teams, our merchants have teed up everything to get us to this point in the season.
It really sorts of kicks off this week with Thanksgiving and then on to Christmas. But we really feel good about where we are with inventory assortment and getting our stores propped.
Paul Trussell
Thanks for the color. And then lastly.
Just nine months into the year in terms of reported results, has there been any change at all to the ultimate opportunity to Family -- for Family Dollar’s margins or any changes to the thought process around the pace of the expansion of ultimate time table to achieve the goals?
Gary Philbin
I don’t know if it’s changed. I think the elements that drive it are the things that we work on just from the standpoint of most everything we talked about.
But I would say on the import side which is always one of the levers that has driven success at Dollar Tree and is an integral part of what we are doing at Family Dollar. You got to remember we bought Christmas [price] basically almost a year ago right after the Christmas holiday.
And so, you take all your learnings, you go over, you find the next best values, you make your strategic reviews and go buy it. We’ll learn something again this year.
But that’s an iterative process on each holiday and each buying trip we go over. That’s the one that probably takes you a little bit longer to go to the seasons and have merchants in the seats to understand what’s working the way they thought, where is the bigger opportunity, what needs to get fixed as you look forward.
The rest of it, we continue to do the blocking and tackling, that’s finding opportunity to sell our customers private brand and drive great selling end caps in our stores that have new and exciting product out there. So, I think we like where we are at.
We see the opportunity ahead of us and focused on building a plan for ‘18 that reflects all of that as well.
Operator
And that concludes our question-and-answer session. I would now turn the call back over the Mr.
Guiler for any additional and closing remarks.
Randy Guiler
Great. Thank you, Matt.
Thank you for joining us for today's call and for your continued interest in Dollar Tree. Our next quarterly earnings call to discuss Q4 and our full 53 week year of fiscal 2017 is tentatively scheduled for Wednesday March 07, 2018.
Have a good day.
Operator
And that does conclude our conference for today. Thank you for your participation.
You may now disconnect.