Dollar Tree, Inc.

Welcome to Dollar Tree Inc.'

's 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 Geiler, Vice President, Investor Relations. Please go ahead, sir. Thank you, Aaron. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the third fiscal quarter of 2019. Participating on today's call will be our President and CEO, Gary Bilvin, and our CFO, Kevin Wadler. 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 the most recent press release most recent 8K, 10Q, and annual reports, which are on file with the SEC. We have no obligation to update our forward-looking statements, and you should not expect us to do so. At the end of our prepared remarks, we will open the call to your questions. Please limit your questions to one and one related follow-up, if necessary. Now, I will turn the call over to Gary Dilton, Dollar Tree's President and Chief Executive Officer.

Thanks, Randy. Good morning, everyone. The third quarter represented another period of solid sales performance for both brands, Dollar Tree and Family Dollar. Our store optimization efforts and sales driving initiatives are working. The teams have completed more than 1,150 Family Dollar H2 renovations, nearly 200 Dollar Tree rebanners, and more than 1,000 Dollar Tree snack zones, and launched our Dollar Tree Plus test already this year. These efforts have driven top line sales and transaction counts at both banners. Fiscal 2019 has been a unique year as the result of several factors. We planned and accomplished the material acceleration of our family dollar store optimization initiatives and the consolidation of our two support centers to Chesapeake, Virginia. Additionally, the global helium shortage, which has an outsized impact on our party business, and the continued uncertainty regarding trade and the related tariffs have impacted our business. I'm proud of our team's efforts and the sales execution through this environment. We worked hard to maintain focus on our customers and our values in store. Our results for the third quarter included sales increase of 3.7% to 5.75 billion, Consolidated same-store sales increase of 2.5%. And our EPS of $1.08 was within our guidance range. Other highlights for the quarter included completing 247 Family Dollar H2 renovations, completing 512 Dollar Tree snack zones, bringing our total to 2,087 across the chain, and repurchasing 11.6 million shares as part of our share buyback program. And in mid-October, we hosted our fourth annual nationwide hiring event focused on hiring more than 25,000 associates in communities all across the country. This event provides individuals with the opportunity to join the Dollar Tree or Family Dollars teams. These new associates can earn the opportunity to be promoted through the field organization. As a growth company, we're always looking for talent and strength that can develop into future leaders in our stores. Our application flow was strong for this successful hiring event. Regarding Dollar Tree segment sales highlights for the third quarter, we delivered a 2.8% comp, representing the 12th consecutive quarter of comps exceeding 2%. Dollar Tree had increases in both traffic and ticket, with traffic slightly outpacing the ticket increase. Geographically, all zones topped positively and were at or better than 2%. Strongest performing zones were in the Northeast, the Upper Midwest, and Southwest. Our cadence of comps through the quarter all three months were better than 2%, with August being the strongest month. Dollar Tree continues to deliver solid positive comps in the consumables category. And our seasonal business continues to perform very well. In fact, Halloween was on par with a very good seasonal sell through we've been experiencing over the past couple of years. Our variety business, which includes party at Dollar Tree, comp positive each month during the quarter, but was again impacted by the helium shortage. We estimate that our comp was negatively impacted from lost balloon sales by about 20 basis points. We expect this helium shortage headwind to continue, but to a lesser degree, for the remainder of 2019. The Dollar Tree merchant team continues to do a terrific job of delivering ever-changing and new product ideas that drive customer excitement and repeat visits. Dollar Tree WOW is the excitement that our customers have come to expect. That zone that started in 27, we have rolled out to great success, and we continue to extend this initiative into more Dollar Tree stores. Last year, we added Hallmark cards to all stores across the chain. This has proven to be a great partnership, and customers certainly love the Hallmark brand, the offering, and the value. And this year, we've been rolling out a new program called Crafter Square. Crafter Square is now in more than $600 stores and is a new and expanded selection of arts and crafts supplies, all priced at $1. Feedback from stores and customers has been fantastic. We'll continue to expand this traffic driving initiative to more stores going forward. The sharing of projects within the crafting community on Pinterest, Instagram and other platforms has made this one of the quickest launches to our customers on a small base of only 600 stores. Let me give you an update on Dollar Tree Plus. As we've discussed previously, we're conducting a test of multi price points at select Dollar Tree stores. The multi price points Multi-price assortment is in increments of $2, $3, $4, and $5. It's being tested in 115 stores. We just reached the six-month mark in the initial stores, as the majority of the test stores were added in June. And we're closely monitoring performance, including impact to traffic, sales, margin, and, of course, customer feedback. As always with tests, we follow an interim process where we test, learn, modify, and and improve along the way. Our focus regarding multi-price point tests as we finish this year moving to 2020 will be on delivering great values to our shoppers within targeted categories, shifting more towards discretionary and unique products that we believe delivers the wow factor to consumers and is additive to the basket and margin profile. utilizing our broad vendor base that sources great value products, and ensuring, as always, that we protect the Dollar Tree brand. Our brand is more than the items we sell for a dollar. The Dollar Tree brand represents a pricing value, and that the customers get tremendous value for what they spend at Dollar Tree. Our efforts to drive this test should include extending our reach by adding great value, exciting merchandise, and opportunities to expand margins. We are still early in this test and look forward to updating you as the test evolves. The Family Dollar team delivered another quarter of positive comps with a 2.3% increase. Importantly, comparable transaction count for the quarter was positive, continuing the trend that began to emerge in midsummer. The team's performance demonstrates that efforts to improve the consistency of execution across the chain and efforts to drive H2 performance are working and are gaining traction. The Family Dollars segment highlights for the third quarter, our consumables business performed very well, delivering its 12th consecutive quarter of positive same-store sales. Our cadence of comps through the quarter, all three months were better than 1.5%, with August being the strongest month. From a zone perspective, comps for six of our seven zones were positive, with the strongest performance in the west, southwest, and southeast zones. Our FamilyGuard customer service scores for Q3 showed improvement from the prior year. Categories of store cleanliness, product assortment, speed of checkout were among the notable improvements. We continue to believe we are taking the right steps to transform our customer experience to increase the frequency of the visits. These steps include improving customer satisfaction, developing brand and price reputation, focusing on opening price points, incorporating better organized and focused dollar impact sections, and sorting more of what our customers need, including frozen foods. And as we expected, the average scores for H2 stores, where we have invested in our fleet, are higher across the board. We continue to be very pleased with the performance of our H2 store format of Family Dollar, All new and remodeled stores are in this format, which is driving greater loyalty, repeat visits, and value perception in these locations. These renovated stores continue, on average, to deliver a comp greater than 10% in their first year post-renovation. We are committed to this format and plan to renovate at least 1,000 Family Dollar stores to the H2 format in fiscal 2020. We began rolling out the H2 format in Q3 last year. We continue to like the sales that we are seeing in the H2 stores now cycling into their second year. Our efforts to drive performance across the store base continue to focus on initiatives around our private brands with Compare and Save, our smart coupons that offer our loyal customers the latest and best values. Walmart cards will be coming to all Family Dollar stores in 2020. And of course, our store manager training and retention efforts, as always, to drive performance and consistency store by store. In our store support center, we are seeing the benefits of having our team's Dollar Tree and Family Dollar together in one location. We anticipate being together will greatly enhance our culture, our ability to recruit great talent, and improve the collaboration within our organization as we train and develop and provide even more and better support for our stores. Looking at real estate for both segments in the third quarter, we opened a total of 165 new stores, 114 Dollar Trees, two in Canada, and 51 Family Dollars. We relocated or expanded 12 Dollar Tree and three Family Dollar stores. We renovated 247 Family Dollars as a part of our H2 renovation initiative. And we re-bent our $39 family dollars to Dollar Tree stores for a total of 463 projects during the quarter. We also added freezers and cores into $138 tree stores, bringing our total to stores with freezers and cores to just over 6,000. During the quarter, we closed 42 stores, $12 trees and $30 family dollars. And we ended the quarter with 15,262 stores. $7,447 trees, $7,815 family dollars. Before I turn the call over to Carolyn, I'd like to provide a brief update on tariffs. Just prior to our last earnings announcement in August, the USTR announced that tariffs on List 1, 2, and 3 products would increase from 25% to 30% on October 1st. Tariffs on List 4A products would increase from 10% to 15% on September 1st. And tariffs on 4B products would increase also from 10% to 15% on December 15th. As noted in our August earnings announcement, our outlook provided at that time did not include any impacts related to these changes. Our updated outlook includes approximately $19 million of cost of goods sold for the expected impact from USTR tariffs. for List 1, 2, and 3, as well as List 4A and 4B tariffs if fully implemented in Q4. Nearly all the expected impact is related to the introduction of List 4A tariffs. Now I'll turn the call over to Kevin. Thanks, Jerry, and good morning.

Consolidated net sales for the third quarter increased 3.7% to $5.75 billion. comprised of $3.07 billion at Dollar Tree and $2.67 billion at Family Dollar. Enterprise same-store sales increased 2.5%. On a segment basis, same-store sales for Dollar Tree increased 2.8% and for Family Dollar increased 2.3%. Overall, gross profit was $1.7 billion compared to $1.67 billion in the prior year's quarter. Gross margin was 29.7% of sales compared to 30.2% in Q3 of 2018. Gross profit margin for the voluntary segment decreased 60 basis points to 34.2% when compared to the prior year's quarter. Factors impacting the segment's gross margin performance for the quarter included merchandise costs, including freight, increased approximately 55 basis points, primarily due to higher freight costs. and distribution costs increased approximately 10 basis points primarily due to higher payroll costs and depreciation. Those profit margin for the family dollar segment was 24.5% during the third quarter compared with 25.3% in the comparable prior year period. The year-over-year decline was due to the following. Merchandise costs, including freight, increased approximately 30 basis points, driven primarily by an increase in freight costs, and higher sales of lower-margin consumable merchandise partially offset by improved initial mark-on. Trink increased approximately 15 basis points, resulting from unfavorable physical inventory results in the quarter. Distribution costs increased approximately 15 basis points due to increased payroll costs at the DCs. Occupancy costs increased approximately 10 basis points due to an increase in real estate taxes, and markdown expense increased approximately 5 basis points, resulting from higher clearance activity in the quarter. Consolidated selling general administrative expenses as a percentage of net sales in a quarter increased 30 basis points to 23.5% from 23.2% in the same quarter last year. For the third quarter, the SG&A rate for the Dollar Tree segment as a percentage of sales increased to 22.1% compared to 22% for the third quarter of 2018. Increase was due to store operating costs increased by approximately 15 basis points resulting from increased debit credit card fee penetration and an increase in loss of disposal fixed assets from an earlier lease termination in the quarter. Payroll costs decreased approximately five basis points primarily due to lower retirement plan expenses and lower insurance benefit expenses compared to prior year quarter, partially offset by an increase in store hourly payroll due to higher average hourly rates and additional hours to support store initiatives. SG&A expenses for the family dollar segment were 22.5% of sales in the third quarter compared to 22.2% of sales the same period last year. The increase in SG&A as a percentage of sales was due to the following. Operating expenses increased approximately 25 basis points, resulting primarily from higher costs related to the disposal of fixed assets in connection with our store optimization initiative. And depreciation and amortization expense increased approximately 10 basis points as a result of the capital home Corporate and support expenses increased 10 basis points, primarily related to store support center consolidation costs and higher depreciation. This included approximately $4 million of expenses related to the Q3 2019 discrete costs associated with our store support center consolidation. For the quarter, the company incurred approximately $9 million in total discrete costs, which was consistent with our guidance. On a consolidated basis, operating income was $358.4 million compared with $387.8 million in the same period last year, an operating income margin of 6.2% of sales compared to 7% of sales in last year's third quarter. Non-operating expenses for the quarter totaled $41.5 million, which was comprised primarily of net interest expense. Effective tax rate for the quarter was 19.3% compared to 17.1% in the prior year's third quarter. The prior year quarter benefited by $15.7 million based on the company's substantial completion of our analysis of the Tax Cuts and Jobs Act on the net deferred tax liability valuation. The current year tax rate reflects the benefit of statute explorations and the reconciliation of the tax revision to the tax returns. For the third quarter, the company had net income of $255.8 million or $1.08 per share. This compared to net income of $281.8 million or $1.18 per annum share in the prior year's quarter. Combined cash and cash equivalents at quarter end totaled $433.7 million compared to $422.1 million at the end of fiscal 2018. Our outstanding debt as of November 2nd was approximately $4.3 billion. During the third quarter, we repurchased approximately 125,000 shares for $11.6 million. At quarter end, we have $800 million remaining in our share repurchase authorization. We will provide updates on additional share repurchases, if any, following the quarter in which they may occur. Inventory for the Dollar Tree segment at quarter end increased 14.4% from the same time last year, while selling square footage increased 7.5%. Inventory for selling square footage increased 6.4%. Our inventory levels reflect the early receipt of imports to mitigate tariffs. We believe the current inventory levels are appropriate to support the scheduled new store openings and our sales initiatives for the remainder of the year. Inventory for the family dollar segment at quarter end decreased 4.2% from the same period last year and increased 0.9% on a selling square foot basis. Based on store closures, the family dollar segment has 5.1% less square footage outstanding. Capital expenditures were $279.8 million in the third quarter versus $228.4 million in the third quarter of last year. And for fiscal 2019, we are planning for consolidated capital expenditures to be approximately $1 billion, consistent with our initial outlook. Appreciation and amortization totaled $160 million in the third quarter and $150.5 million in the third quarter of last year. For fiscal 2019, we expect consolidated depreciation and amortization to be approximately $635 million. We've updated our outlook for fiscal 2019 and have lowered our guidance for Q4 based on the following expected effects. With regard to tariffs and USTR announcements, we estimate that Section 301 tariffs will increase our cost of goods sold by approximately $19 million, or $0.06 per deluge share in the fourth quarter, if the tariffs are fully implemented. Almost all of the cost is due to List 4A, as its timing did not allow for significant mitigations. We expect additional pressure on merchandise margins based on lower margin consumables growing faster than originally forecasted. We expect distribution costs to be higher than originally forecasted, primarily due to payroll cost pressures from higher turnover, which may affect productivity. Expenses related to repairs and maintenance, utilities, and depreciation are now expected to have a higher run rate than originally forecasted. Additional assumptions in our outlook are the calendar considerations for the remainder of the year, which That is that there will be six fewer selling days between Thanksgiving and Christmas, which will negatively impact Q4 sales. We expect continued pressure on store payroll based on competitive markets, states increasing minimum wages, unemployment levels, and completing the company's initiative plans, including H2 renovations and snack towns. We estimate year-over-year domestic freight costs as a percentage of sales to be slightly lower in the fourth quarter. Import freight rates, as we noted on last quarter's call, will increase based on our April rate negotiations. and beginning in January 2020 as a result of low sulfur fuel requirements for ships. That interest expense will be approximately $41.9 million in Q4. We cannot predict future currency fluctuations. We have not adjusted our outlook for currency rate changes. As always, our outlook assumes no additional share repurchases. Our outlook assumes a tax rate of 22.3% for the fourth quarter and 21.4% for fiscal 2019. The average of those share counts are assumed to be 237.7 million shares for Q4 and 238.2 million shares for the full year. For the fourth quarter, we are forecasting total sales to range from $6.33 billion to $6.44 billion and to lose earnings per share in the range of $1.70 to $1.80. These estimates are based on a low single-digit increase in same-store sales and year-over-year square footage growth at 1.1%. For fiscal 2019, we are now forecasting total sales to range between $23.62 billion and $23.74 billion based on a low single-digit same-store sales increase and approximately 1.1% selling square footage growth. The company anticipates gap net income for diluted share for the full fiscal 2019 will range between $4.66 and $4.76, which includes a discrete cost of approximately $85 million or $0.28 per diluted share approximately $15 million or $0.05 per annum share of store closure related costs, and approximately $19 million or $0.06 per annum share related to tariffs. I'll now turn the call back over to Kevin.

Thanks, Kevin. Like I mentioned at the beginning of the call, 2019 has been a year of distinct opportunities. We planned and executed the material acceleration of our Family Dollar store optimization initiatives. Net zone resets at more than $1,000 tree stores. and the consolidation of our two banners to our store support center in Southeast Virginia. We accomplish this against the backdrop of the helium shortage, the uncertainty regarding trade and related tariffs, continued impact of freight costs and DC costs affected by the increasing starting wage rates. I'm part of the sales results at both Dollar Tree and Family Dollar that were accomplished in a quarter. This is done In the first three quarters of the year, with more than 2,000 stores disrupted from our initiatives, we invested in our stores, our starting rates in specific markets, and have our fleet of stores ready for the fourth quarter and the key holidays. As stated in today's press release, we also announced that we'll do at least another 1,000 H2 renovations in 2020. Our confidence in this model grows as we have more across our fleet of stores and various types of settings, demographics, and densities of population. We will announce our new level and other store level capital plans for 2020 at the end of Q4. The impact on our gross margin in specific areas is ours to control and do better. We're focused on making improvements across several categories as we finish the year and start 2020. These areas include improving our shrink results, enhancing efficiencies within our supply chain to better manage freight costs, driving sales on the discretionary side of our business to reduce mixed headwinds to margin, and tariff mitigation efforts. For shrink, our plans are focused on enhancing allocations and right size inventories to all of our stores, especially those with a high shrink history. continued focus on training throughout our field leadership, district and store teams, adding loss prevention tools within our stores. And last week, we're pleased to bring on a seasoned, experienced retail executive in a senior VP role to lead both our Dollar Tree and Family Dollar asset protection teams. The asset protection teams from both vendors will report to him effective immediately in our visibility to market issues, external and internal, will be enhanced with the combined teams in priority high shrink markets. Our opportunities across our supply chain and freight costs are focused on optimizing our less than truckload inbound costs, fitting our key freight lanes, continuing to reward our best carriers by building that deliver on cost and service, and getting back to our historical backhaul levels. On the discretionary side, at Dollar Tree, we are working hard to overcome our helium shortage with more party-centered items to service our customers. For Family Dollar, we like what H2 has done for the top line in transactions. We're focusing specifically around the impact on driving more discretionary within our stores. This includes our wild tables, our dollar impact sections, and the queuing assortment at checkouts. We still have more runway for all of these discretionary sales in these areas. We're building on important categories that are doing well, especially around mom with kids, across a combination of all things needed for young kids, including infant apparel and baby needs. Enhancing our party footprint with the addition of Hallmark branded cards and family darts through the first half of 2020. For tariff mitigation, we are planning to continue efforts to mitigate ongoing and potential new levels of tariffs as we head into 2020. These efforts include the continued support of many vendors to lower cost, the redesign of product or packaging, efforts to shift mix between higher and lower cost products, awarding volume from multiple vendors to our most competitive suppliers, moving product out of China to affect lower landed cost of goods, and our combined team's purchasing power throughout all of Asia. And as always, finding new vendors domestically and in other countries to develop the new and exciting values that our customers have come to expect. We are in the planning stages for 2020, and we'll provide details related to 2020 outlook on our fourth quarter earnings call. I believe our store teams are well prepared for the holiday season. I would like to sincerely thank each of our associates as we head into the fourth quarter and holiday season. More than 415,000 stores across the US and Canada, our network of 25 distribution centers, and of course, our store support center in Virginia. Thank all of them for their commitment, dedication and efforts to deliver value and convenience to our shoppers each and every day. Finally, we continue to focus and make meaningful progress to grow and improve our business for both brands. We are well positioned in the most attractive sector of retail to deliver continued growth and increased value for our shareholders. The combination of more than $15,000 tree and Family Dollar stores provides us the opportunity to serve more customers in all types of markets. The combination of two great brands provides great flexibility in managing our future growth. Operator, we're now ready to take questions.

Thank you, sir. Ladies and gentlemen, if you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. As stated earlier, in the interest of time, we ask that you please limit yourself to one question and one brief related follow-up question. so that we may answer as many questions as possible. As a reminder, that is star one. We'll go first to Scott Ciccarelli with RBC Capital Markets.

Good morning, guys. Can you talk about the margin profile on the remodeled family dollar stores and relate to that, given the mix that you have in those remodeled stores, which is much more consumable-based? Is there a reason to believe gross margins can improve on a go-forward basis, or has that higher mix of consumables in each source effectively reset the gross margin profile for family dollar? Thanks.

Hey, Scott, this is Gary. You know, we're pleased with H2 because when we went into this, we knew we were adding in more frozen food doors and some more food that obviously has an impact on margins. But we also went into it with the thought of let's offset that with some of what we do on immediate consumption, the queuing lines, the allow tables. I just think some better adjacencies throughout the store. Early on, we saw some degradation in margin. But as we sit here now, H2 is neutral to the fleet. But we didn't do this to be neutral. Our goal here is to have margin expansion within H2. So we're on the right path. We've got traffic going in these stores, and obviously you've heard us call on the comp. You know, our next workflow is maintain all that and add margin expansion to an H2. We like everything that the customers are telling us about it. We like the results on the top line in sales, and we've got to get going on the margin mix now.

And what kind, on a go-forward basis, Gary, and that's helpful, but what kind of margin improvement do you think is realistic if we're looking at early next, I don't know, four to eight quarters? Because, I mean, we've seen several hundred basis points of gross margin degradation in that business, and I guess I just kind of keep coming back to the question, you know, do we have a true reset here, or is that something, you know, once we establish, you know, the better top line, we can kind of figure a way out?

Well, I've always said we need to get to an inflection point on the fleet. We were rebuilding stores, basically one store at a time with H2. We did over 1,000 in the first three quarters this year. You know, we're planning on doing 1,000 next year. I need the top-line sales. I think that's what H2 has given us. The work on the margin, you know, Q3 for Family Dollar, I think it was about an 80 points increase. difference year over year comparison. You know, the expansion that can rise across the whole fleet are some of the things I've talked about. We've got to focus on the discretionary, seasonal, apparel, electronics. You know, all those are the categories that I think get teed up in the right way in H2. It doesn't mean that the rest of the fleet can't benefit from some of the same elements and efforts across the fleet. So You know, we're putting together our 20 plan with specific initiatives around those discretionary categories to drive, you know, maybe get the same benefit that we've really seen on the consumable side. We've got more folks coming through the front door here. And that is as important as anything that we do. And now I've got to get them over to the other side of the store to buy more of the discretionary product. That's doable. More to come when we announce our 2020 plan.

Okay. Very helpful. Thanks, Seth. We'll go next to Michael Lasser with UBS. Good morning. Thanks a lot for taking my question. So at what point do you think you'll have a reasonable level of visibility into the business? The factors that you mentioned outside of tariffs that contributed to your 10% to 15% decline, the reduction in your fortune guidance, including mix, payroll pressures at the DCs and increase around rates for repairs and maintenance and utilities and depreciation should have been somewhat known and not really surprising. So is it once you get past this, then as we get into the first part of next year, do you feel confident you have a level of visibility into the profitability of this business, or is it going to take longer than that?

Michael, it's Kevin. You know, I think if we look at it as a The items we called out, you know, obviously the shift in mix as we've seen the basically the consumable business outpace even what we have forecast. And really that's in both brands, more so in the Family Dollar brand than the Dollar Tree brand, but it's in both brands. So the Dollar Tree brand, we've got some good things going with frozen food, refrigerated, and in center aisle as well. So a lot of things going on there. And again, a little bit of overall effect from the helium shortage and the halo effect to the party department in general. On the family dollar side, obviously, you know, we haven't seen the discretionary business, you know, kick in as well as we'd like it to, to Gary, what he was just speaking to. A lot of opportunity there. Getting customers in the door is key, obviously, and getting the food. discretionary item is very, very important. I think as we honestly look at other pieces of the business, obviously we call that VC costs. Really, this is not an area we've called out in the past so much. It's really been more of a bigger topic as of late as we've gone into what we would call our seasonal peak here in the end of Q3 and beginning of Q4 as we look at you know, basically getting all the merchandise through the buildings. And with unemployment like that, it's obviously required us to bring up basically starting wages and, you know, making sure we can engage with those associates and train them appropriately.

Michael, Gary, I would just add this. Now, keep in mind this was a year that with everything we talked about at the beginning of the year, the store initiatives, 2,000 stores, at various times, you know, torn up. Keep in mind, at the DC level, we were also not just shifting rebanners back and forth, we are also shifting product back and forth, especially with the impact of our dollar sections and some of our wow items. So the, you know, along the way, we combined a store support center too. With all those balls in the air, I give credit to our store teams and our store support teams to get that done. You know, everything that we're talking about here gives us, you know, the consistency, visibility as we go forward in 20. We have done all this, really, with major initiatives, both in our store base and our store support center. So, listen, the things that we're focused on are the right things to drive the business. And with all that going on, we drove sales throughout the year and with the H2 stores, building momentum throughout the year. I'm really pleased with where we've had up on the top line and initiatives around the margin piece, you know, we got to get after on each of them.

It's totally reasonable, Gary. It just seems like investors want some timeframe on when they can hold you accountable to an improvement in profitability and better visibility because there have been a lot of disappointment over the last few years and having some sense of when that might turn would be helpful to the investment community. And as part of that, are you still committed to the 14% to 18% EPS growth off your original guidance that you provided earlier in the year for 2020? And why would that no longer be the case?

You know, Michael, as we've said before, that was at a point in time. What we knew at that point in time, obviously, we're working through and finishing up our 2020 plans. Obviously, the biggest unknown as we sit here today for us and many other retailers is tariffs and where does that land at the end of the day. So, obviously, we're committed to improving our business. and improving on the many things we've talked about already this morning. But whether, you know, we'll give obviously guidance when we get to our fourth quarter call and hopefully we'll have some clarity around all those things.

Okay. Thank you very much and have a good holiday. We'll go next to Paul Trestle with Deutsche Bank.

Good morning. Thanks for taking our question. I know you give guidance on a, you know, consolidated basis, but to the extent possible, could you give maybe a little bit more detail regarding your expectations per banner as we think about comps and gross margin and SG&A into fourth quarter? And then as a follow-up, just bigger picture for Dollar Tree, you know, margins look like they're going to be down this year. And just curious if you can walk through what some of those, what you view as more temporary in nature as we kind of turn the page into 2020. Is this a business that you believe can get back to expanding margins? Thank you.

Yeah, Paul, this is Kevin. You know, I think as we look at it, again, we don't get guidance by Banner. Obviously, when you look at it from a, what I can give you a little feel for for Q4 is if you look at the guidance we gave today and you can back into a range of operating income based on all the data we've given you and I would tell you that it's basically, you know, right around 9% or just above. If you compare that to prior year excluding the items such as the markdowns for aged goods, clearance of inventory, and store impairment. I would tell you that the pressure between basically gross profit and SGMA is fairly consistent. So we're seeing pressure on both line items. So that just gives you some directional ability to think about that. I think as we look at this year and as we look at obviously the fourth quarter, fourth quarter is a big quarter for Dollar Tree from a seasonal perspective, so we get a pretty good boost in sales just from a seasonal set, which obviously has always provided us the ability to basically provide a good gross margin. I don't see that any different. Our seasonal sets this year performed very well. We had a very good Halloween set. We had a very good performance with our Halloween seasonal and feel good about going into the fourth quarter with our Christmas set. So I think that always bodes well. Obviously, we do have the six less selling days, but that doesn't mean we're not going to try to make sure we do everything we can to get every last sales dollar that we can at the end of the day.

All this, Gary, let me sort of answer your question. What's temporary? And start with Dollar Tree. The things that we've been chasing this year... Start with shrink. It's a both banner issue. But shrink is something I have an expectation we're going to do better on next year. We're coming off of a second year of not great performance, and we can do better. I think the freight piece we started talking about last year was certainly a bigger impact in the first half. We're going to see some of that modify in the second half, but we're still significantly up year over year. And the distribution cost, I think, listen, I don't know if it's temporary or not. I know that it impacts us when we have more folks coming into a D.C., and it's really not even what you had to pay folks to get into D.C. It's almost the productivity that you lose in the D.C. because you've got new folks that you've got to train and retain. Those are the things that I think, you know, were the one-offs for both banners that I would expect us to make improvement on. and the initiatives we talk about. The mix on product, to me, is a bigger issue at Family Dollar than it is at Dollar Tree. We are happy with what H2 has done. But across 2019, we've worked hard on keeping sales going. And, you know, we've just got to find some of the same elements that drive customer traffic into those sections as they do on the consumables. For Dollar Tree, you know, I don't know how to think about tariffs. But as always, it's going to be about incorporating the next wow into the stores. We'd like what Snack Zone has done for a little pressure mix. That's why we got Crafter Square going. The year before that, we started out Snack Zone, but we put in Hallmark. So it's always, you know, what we push and pull with to drive customers on both foot traffic and sales and margin. We're going to do that again as we go into 20. So those are going to be the pieces that we talk about category by category. Hope that's helpful.

Yes, thanks for the color. Best of luck. We'll go next to Peter Keith with Piper Jaffray. Hi. Thanks. Good morning, everyone. So I wanted to look at the tariff impact. Certainly, it's a very volatile situation with a lot of unknown changes. It sounds like, though, the impact to Q4 is really just because of the timing with 4A implemented. It didn't have time to adjust. Are you still confident as you look at the 2020 that you think you'll be able to mitigate most of the List 3 and List 4 tariff pressures?

Here's Gary. You know, List 1 through 3, I think the teams have been through a couple cycles now of working with our vendors to, you know, either at slower cost or redesign packaging so we can land it. And in some cases, we're moving outside of China, as you've heard us talk about. And even on this last trip, as we are buying already following Halloween next year, we've moved additional product out of China. So you're not going to be able to pick up that entire supply chain, but that's where we do sometimes item by item, vendor by vendor, as we see those opportunities. you know, as we go into 4A and 4B, it's more of our product. And, you know, as always, I want to go into 2020, I think, with some compelling product. And we're going to do the smart things around what we have to do to do the best we can to mitigate. I've also told our merchant teams, you know, at the end of the day, I want to be able to see what it is we might be changing or the opportunity to move right away from a vendor to another country before we do it. So for a, you know, what we've seen is when it gets announced and we don't have much time to mitigate, that's what we're calling out with the Q4 impact. Going forward, when we get a chance to get on a regular cycle by and meet with our vendors, Yes, we can mitigate more of it. I just don't have full vision of that until we go on a big buying trip in January, which will be our first time really to meet with all of our vendors. And I'm assuming at that point, 4B is in effect as well.

Okay. Thank you for that. And then just on the discussion of mix, particularly with the H2 remodels, One thing I'm trying to get my head around is it would seem that with the increase of $1 items that you would be experiencing greater buying scale with similar items from Dollar Tree and Family Dollar. So it does seem to me, at least from the outside, that there would be some benefits to mix from $1 items. So are we misreading that, or is it just that the discretionary weakness is overarching negative on the business?

Well, you heard me talk a little bit about, you know, an H2 four-wall margin is about neutral to the fleet. And so the overall mix change that we're experiencing is no different at H2. What's different is that we invested heavily with more of our lower-margin frozen food and additional expansion of some key categories in center-to-store food as well. That's lower margins. That's been offset, you're exactly right, with the impact of the dollar sections, with the queuing assortment, with dollar wild tables, with immediate consumption. So the fact that we're back to fleet neutral margin, I think shows the power of some of those sections. We just got to amp it up another level to get margin accretion going in an H2 store. So the way I look at it with the team, we almost take a look at, here are the sections we've invested in. What's our sales and margin on a frozen food category? And is that being offset with some of those other sections? And that's pretty much what we're seeing right now.

Okay, thanks. That's helpful. Good luck this holiday season. Thank you. We'll take our next question from Joseph Feldman with Tulsi. Hi, guys. Thanks for taking the question. Just wanted to

get a little more uh understanding of like the the higher price point test and what how are people responding to that so far uh you know i would say as folks come in i would say it's uh one-third folks have uh seen the product and uh you know buy it one-third of our loyal customers have commented uh you know that they don't like the multi-price coin in our stores and uh You know, one-third are somewhere in the middle. Here's my view from everything we've interviewed our customers with. It's not so far, you know, we've had a priority on more consumables, which I think were an item that we wanted to test, get out there across categories. The next phase of the test is more about what I would call the Dollar Tree well side of it. We went over on our buying trip this July to buy specific categories. So I would call them more on our variety discretionary side, things that people haven't seen. And we'll see how customers respond, but I think that's more to what our customers are going to enjoy seeing incredible values on and allow us under our Dollar Tree Wow umbrella to say, that's a great item, I don't see anywhere else, and I know that costs more when I do see it. And I think that's going to be what we push on into some of the showing up in stores now, but into 2020. So when we get a chance to, you know, test and learn and put new products in, especially when we can design them and import them or find discretionary items domestically, I just think that's going to be the next phase of the test that gives us another important data point. Our customers that buy it, you know, tend to buy more than the average Dollar Tree transaction. But, you know, I go back to what success and success in this is really to increase the reach of Dollar Tree to another segment of customers, another chance to increase margin as well. And, as always, protect the brand to say this is the wow factor at Dollar Tree. Those are the things that are in the mix. I think, you know, we have some exciting pride coming in, and we stay close to watching that week by week.

Thanks, Gary. And then one follow-up. I know you outlined a couple of efforts on the freight side that you can do, like, you know, optimize LTL and back to historical backhaul levels. Like, how – challenging a project is that to improve the freight side? Like, is that something that we can see happen pretty quickly into next year?

Well, we are seeing some modest year over year declines right now with it. And, you know, the things that we're doing, we're in control, but we need to get out the process. Now, somebody has to sign up for the lower bid and give us great service, both on inbound and outbound to get those rates. So, you know, I'd like to think that it's something that as we read some of the same headlines, we are not in the same position as the truck driver shortage exactly at this time a year ago. I think that bodes well for us. The opportunity when we get better service on the outbound allows us to do more backhauls. So we're going to go into 2020 pushing all the levers we know to do to get both lower freight and better service. And, you know, we'll understand better once our important third-party suppliers and independent truckers continue to give us service as we expect to as we finish out Q4 into 2020.

Thanks. Good luck with the holidays. Thank you.

Thank you. Ladies and gentlemen, due to time constraints, we have time for just a couple more questions. We'll go next to John Heinbacher with Guggenheim Securities.

Hey, Gary. I'm curious when you think about the real estate composition of the 1,000 remodels you're going to do with Family Dollar this year, this coming year, how will that be different than this past year? Is there a desire to maybe cluster more? And if you do cluster more, can that lift the brand perception at non-remodeled stores if you do that?

Well, you know, we do take a look at where is the number of stores. We went into this knowing that we wanted to fix some of the oldest stores in the fleet. So based on the last year of touch, we went into what the best opportunity based on volume. We do need a certain size. And really what we're skating to is by the time we finish these next thousand, we ought to be close to 40% of our fleet there. or a little better, being less than five years old. And I think to your point, that does give our customer a different perception of what they've seen at Family Dollar. So it's not necessarily that, you know, everything has to be age two. We've got some great stores out there that are not. But we are changing the face of what the customer sees with this store initiative, along with what we closed, along with what we re-bannered to Dollar Tree. So the combination of all those things gets us closer to an inflection point, which is, I think, what you're talking about, what does that customer see. And, you know, inside the store, the consistency around store standards, conditions, and stocks are important across all those. the factors of the different stores that we run. So that's what we're aiming for. And as we get more and more stores with the same opportunity, we're still measuring what's our biggest return on capital as we go and invest in these stores. But I think just by the nature of our fleet with where we are across the country, we're starting to get some critical mass into some key geographies.

And then lastly, when you look at the private brand penetration opportunity, recognizing it's all consumable at FDO, but is that another 500 basis point penetration opportunity? Is it much bigger than that? What do you think that shakes out?

Well, we've always said we're in the low 20s, you know, as a brand, which is, you know, pretty darn good. I mean, it's not grocery store-esque because we're not a grocery store. But I think across the categories, you know, what I would like to see is something closer to 100 basis point improvement consecutively over a number of years. I think that's the opportunity in front of us. And I think it speaks to, one, having great product and values in store, and number two, our customer just needs it because she's stretching a budget and the commitment on what we compare and save to national brands. I think 15-hour wheelhouse. I think the magic to it, as always, is introducing customers, because they'll step up to private brands on something that first is something that they try at home because it's a detergent, and then they'll go to HPA products, and then they'll go to food products. And the team's done a wonderful job on rebranding across the different categories, and I think that's opportunity still with runway to it.

Thank you. Thank you. We're going to do Karen Short with Barclays.

Hi, thanks. Just one clarification question on tariffs and a bigger picture question. In terms of the 19 million, is it still fair to think of that split kind of 70% Dollar Tree and 30% Family Dollar in terms of the impact? I think that was the original split you gave back a couple quarters ago.

Karen, as you look at the $19 million, it's more skewed to Dollar Tree than the 70%. So the vast majority really relates to Dollar Tree. Small piece of it does relate to Family Dollar.

Okay. And then I guess just in terms of Family Dollar 2.0, I guess I'm wondering if you could give a little color on what the second year sales list is. I know it's still early days, but any color there. And I guess maybe a little color on... Why do you think you're having more challenges in terms of getting the discretionary spend in those stores?

I would say, you know, when we think of it, let me answer the second question first. You know, it's still a customer that comes in and I think is responding to what we've done. I mean, you just buy consumables on a weekly basis. The discretionary is tight, sometimes to the seasons, but more times when I have customers for our customer, a little more jingle in our pocket across those discretionary categories. So it's a piece of always we've got to have the right values in front of our customer across each of the categories. So, you know, maybe a part of this, Karen, I would even say as we went in, just knowing 2,000 stores are going to be disrupted, 1,000 plus at family dollars, You know, we went into this year saying, you know, this is not the year to not have foot traffic coming in. H2 has been giving that to us. We've been hitting the gas that's not just been H2 that's driving the comp. So all boats have been rising. I think that was important with knowing we were going to have the downstroke on the store initiative going into it. So I think we've just had some better compelling values in front of the customer on the consumable side. And Not that we didn't, you know, give her, you know, all the thoughts and how we laid out this door, but I think we've got to get back to the basics of blocking and tackling on the discretionary side.

Okay.

What was your other piece of the question?

Year two, H2 comp.

Well, we're early in. Yeah, we like the comps. You know, I'd like to, as we get more stores into this, I mean, we just finished up 1,100 and change of H2. You know, that profile is, you know, has stayed consistent with the addition of more stores across geographies, across sensitive populations. So we do like that. I think as we get into the second year here, their stores are still cycling some of their grand opening activities from last year. So more to come as we get more stores into that bucket.

Okay. Can I ask one more question regarding Dollar Tree, Banner?

Sure.

Is there any variation in terms of the various stores on urban versus suburban versus rural? I mean, you kind of gave that third-to-third-to-third comment in terms of the customer response, but is there any pattern on any of those markets in particular?

For Dollar Tree?

Yes.

For Dollar Tree Plus? Yes. No, I would say I can't tell you there's a nuance there that really says there's much of a difference. I think it's more about the product, Karen, than anything else at this point.

Great. Thank you.

And ladies and gentlemen, we'll take our final question today from Matthew Boss with JPMorgan. Great. Thanks. So, Gary, maybe larger picture.

How would you assess the health of the low-income consumer today? Any changes to the competitive landscape that you've seen impacting any of your strategies? Or is it best to just think primarily that this is company-specific execution here?

Well, listen, we've been rebuilding our execution and rebuilding our banner. So I think that speaks to satisfying this customer. I think that's what H2 calls out, that when we get – a shopping environment that's compelling, exciting, and has the items they want, they'll respond to it. To answer your question on the customer, listen, I think on a plant at an all-time low, I think folks in general can find a job these days. I think the opportunity is still oftentimes they're, you know, one doctor bill or one car repair bill away from nothing in such good shape, and that's really important. our opportunity to make sure that we have the right items to help them navigate a budget from beginning of the month to the end of the month. So I would say things are maybe slightly better because of jobs. But I never like to stray too far from a customer that is keenly focused on value, convenience, and that's the crosshairs of our family dollar ought to just win the customer. with everything that we've been talking about, with H2 and the entire fleet.

Great. And then, Kevin, maybe just to follow up on gross margin, at the Dollar Tree banner, so this is the second straight quarter at 55 basis points, merchandise cost, headwind, net of freight, and 10 basis points of distribution pressure. How do these two items specifically shape up for the fourth quarter? And then do you still view 35% as the structural multi-year gross margin for the Dollar Tree concept?

Yeah, I think as we look at it, you know, as we've said, we look at freight and port core, which said domestic, we feel like, you know, we're headed in a little bit better direction, could be flat to slightly down year over year. So that's a good news item. Obviously somewhat offset by the fact that our import freight is going up. So I think overall, I think you would look for the freight effect maybe to be a little less as we go through Q4. I think as we look at just margin in general, obviously, as we've talked about, healing is a component of this. It does have a halo effect on what is one of our biggest departments and one of our most profitable departments. And so we'll feel a little bit of that, but the team is working really hard to – create other exciting items within that department that will drive that business, whether we have helium or not, which obviously they're working hard to make sure we have helium as well. So some moving pieces there. I would expect, though, that if we do the things we need to do to execute on improving our freight going forward, that you'll see it be less of an issue as we get into Q4 in the new year.

Great. Thanks for the call, Wayne.

And this does conclude our Q&A session. At this time, I'd like to turn the call back to Randy Geiler for closing remarks. Thank you, Aaron, and thank you for joining us for today's call. Our next quarterly earnings conference call to discuss Q4 and full year results is tentatively scheduled for Wednesday, March 4, 2020. And ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.