Good day, everyone, and welcome to the Dollar Tree, Inc.'s Fourth Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Randy Guiler, Vice President, Investor Relations. Please go ahead, sir. .
Thank you, Dana. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the fourth quarter and full year fiscal 2014. Our call today will be led by our CEO, Bob Sasser, who will share insights on our performance and an update on our business initiatives.
Kevin Wampler, our CFO, will then provide a more detailed review of our financial performance and details related to our initial outlook for 2015.
Before we begin, I would like to remind everyone that various remarks that we will make about future expectations, plans and prospects for the company constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors included in our most recent press release, most recent current report on Form 8-K, quarterly report on Form 10-Q and annual report on Form 10-K, which are on file with the SEC.
We have no obligation to update our forward-looking statements, and you should not expect us to do so. Unless otherwise noted, all margin, net income and earnings comparisons presented today exclude the impact of the Family Dollar Stores acquisition-related costs for the fourth quarter and full year.
Acquisition-related costs for the fourth quarter and full year are included in the adjustments column of our income statement included in today's earnings release. At the end of our prepared remarks, we will open the call to your questions. [Operator Instructions] Now I will turn the call over to Bob Sasser, Dollar Tree's Chief Executive Officer. .
Thanks, Randy. Good morning, everyone. This morning, we announced Dollar Tree's results for the fourth quarter and full year fiscal 2014. For the quarter, same-store sales on a constant currency basis increased 5.6%. Total sales grew 10.8% to $2.48 billion.
Operating income increased by $42.1 million or 12.1%, and operating margin for the quarter was 15.8%, a 20 basis point improvement from the prior year's fourth quarter. Net income increased 12.2% to $239 million, and adjusted earnings per diluted share increased 13.7% to $1.16 compared with fourth quarter 2013 earnings of $1.02 per diluted share. .
For the full year fiscal 2014, total sales increased 9.7% to $8.6 billion. Same-store sales on a constant currency basis increased 4.4% as a result of a 3.4% increase in traffic and a 90 basis point increase in average ticket. Operating income increased by $98.4 million to nearly $1.07 billion.
Operating margin was a sector leading 12.4%, a 4 basis point increase versus the prior year. Net income was $645.6 million compared with $596.7 million last year, and adjusted earnings per diluted share was a record $3.12, an increase of 14.7% compared with $2.72 per diluted share last year. .
I'm extremely proud of our team's performance in the fourth quarter and throughout 2014. We have great momentum in our business as we serve a very loyal and growing customer base. In fact, in 2014, for the first time in company history, we exceeded 1 billion customer transactions in a year.
Our results continue to validate that Dollar Tree is part of the solution for millions of consumers, as they strive to balance their household budgets. Our merchants continue to deliver product that exceeds customer expectations, and our store teams consistently provide a clean, fun and friendly shopping experience.
Our focus continues to be on serving our existing customers better, while taking every opportunity to gain new customers in every store every day. Our operating margin continues to lead the discount retail sector, while our values are greater than ever and our prices, as always, are just $1 per item.
Our customers know that at Dollar Tree, you can splurge. Yes, you can afford it at Dollar Tree. Same-store sales were solid and accelerated throughout the quarter. Performance in the home, seasonal and basics divisions were tightly grouped and our sales increase resulted from strength in both basic consumables and discretionary products.
Top-performing categories include party supplies, household products and food. Additionally, sales performance in the fourth quarter was relatively consistent across the country, with all zones achieving positive same-store sales increases. .
Our merchandising teams put together a terrific plan for the fourth quarter and the store teams work together to execute the plan. Immediately following Halloween, the stores transitioned swiftly for the upcoming holidays.
When our doors opened on November 1, store presentations boldly communicated Dollar Tree was the go-to store for our customers' Thanksgiving and Christmas needs. In early November, we focused on first of the month consumables, including Thanksgiving-related foods like chicken broth, vegetables and soups.
We placed emphasis on taking care of the customer needs related to holiday meals, with baking basics, mixing bowls, foil pans, Turkey basters and food storage containers, and we addressed the customer's needs related to holiday entertaining with catering trays, bowls and servers.
Our home for the holidays promotion featured dinnerware, glassware, table linens and snack foods, like cookies, mints and party mix, all for $1. .
Immediately following Thanksgiving, our stores made a swift transition to holiday decorations, Toyland and great gift ideas.
This year, merchants and storage worked together to build upon last year's introduction of the Last 10 Days strategy by bringing all of the last-minute categories together, and re-merchandising the front of the store with a purpose.
Our goal is to be the gift supply headquarters for items like holiday tins, gift bags, tissue, wrapping paper, scissors and tape. If you need to wrap it, bag it, box it or tag it, Dollar Tree is the store for you.
In addition to our seasonal energy throughout the quarter, our stores continue to highlight and promote our million dollar brands that provide great values to our customers. These are brands they know and trust like Downy, paper towels, Crest toothpaste and many more.
Following the Christmas holidays, our stores transitioned quickly to party supplies for the big game season. At Dollar Tree, we operate in an environment of continuous improvement, always striving to improve from season to season. We ended the year with our inventory clean, well-balanced and stores prepared for the new fiscal year.
Our Valentine's Day season was terrific, and our sell through was solid. .
Looking forward, we're positioned for increased relevance to our customers, sustained growth and improved profitability.
We have many opportunities to continue growing and improving our businesses through opening more stores, increasing the productivity of all stores and further developing our newest formats, new markets and new channels as growth vehicles. .
In the fourth quarter, we opened 90 new stores and we relocated and expanded 6 existing stores for a total of 96 projects. For the full year 2014, we exceeded our new store target of 375 stores and opened 391 stores.
Total square footage increased 7.4% over the prior year and we ended the year with a total of 5,367 stores across 48 states and 5 Canadian provinces. .
I'm extremely pleased with improvements in our inventory management. In 2014, we added 391 new stores and 3.2 million selling square feet, yet our overall inventory dollars remained essentially flat to the prior year and our inventory turns improved approximately 30 basis points. Our seasonal sell through was strong.
Our basic in-stock was maintained, and when the customers were shopping, our stores were ready. Thanks to the efforts of our merchant, logistics and store teams, we started fiscal 2015 on plan with clean inventories, well-prepared to support first quarter 2015 sales plans.
For the full year 2015, our plan includes the opening of approximately 400 new stores and 75 relocations for a total of 475 projects across the U.S. and Canada. Square footage is planned to increase 7.2% over fiscal 2014. .
In addition to new stores, we continue to execute our strategy on improving productivity in our existing stores. The components of this strategy include, first of all, category expansions.
Our customers are finding more value as we continue to rationalize and expand assortments in pet supplies, hardware, health care, beauty and eyewear, as well as home and household products. Customers are continuing to respond favorably to our powerful and relevant seasonal and party presentations.
Our seasonal assortments continue to create merchandise energy as our storefronts change with the seasons. At Dollar Tree, we strive to own the seasons at the $1 price point. Store teams continue to focus on customer engagement in our stores and especially at the checkout counters to drive impulse and related item sales.
We are keenly focused on providing value and a shopping experience that exceeds the expectations of every customer in every store every day. Being first-of-the-month-ready is important to our customers.
Our merchants and our store associates place increased emphasis on displays of basic consumable core items at the first of each month when more customers are shopping for their basic needs. Additionally, we're continuing the expansion of our frozen and refrigerated category.
In the fourth quarter, we installed freezers and coolers in 82 additional stores, bringing our 2014 total to 473 additional stores. We currently offer frozen and refrigerated product in 3,621 stores with plans to continue adding this important category to more stores.
Frozen and refrigerated merchandise is generally lower margin, but it is fast returning, more frequently purchased and the increase in shopping frequency provides Dollar Tree the opportunity to drive incremental sales across all categories, including the higher-margin discretionary product.
Most importantly, the product serves the needs of our customers. .
In addition to new Dollar Tree stores in the U.S., Dollar Tree Canada and Deal$ are key brands in our portfolio and key components of our growth strategy. In fourth quarter, we continued to grow our store count in Canada by adding 5 new stores.
For the full year 2014, we added 30 net new stores, expanded 2 stores and ended the year with a total of 210 Dollar Tree Canada stores. We are building the merchant and store teams in Canada to better serve the Canadian customer.
Leveraging the buying power of Dollar Tree, our merchants are sourcing higher value product and our Canadian customers are finding broader, more exciting assortments and better values in the stores. We're pleased with the progress we're making in Canada, and in fact, the fourth quarter comp for Dollar Tree Canada was the strongest quarter yet.
We have significant growth potential in Canada. We're confident the Canadian market will support up to 1,000 Dollar Tree stores and this is in addition to the 7,000 store potential for Dollar Tree in the United States. We want to be recognized by customers as the leading retailer in Canada at the single price point of $1.25 just as we are in the U.S.
at the $1 price point. Our Deal$ format further extends our ability to serve more customers. By lifting the restriction of the $1 price points, we have the opportunity to serve more customers with more categories. Deal$ stores provide low prices on everyday essentials, party goods, seasonal and home product.
The stores operate using a multiple price point strategy, and they have the potential to generate higher store volume with a higher average ticket. We ended the year with a total of 219 Deal$ stores. .
In addition to Dollar Tree, Dollar Tree Canada and Deal$, our online business at Dollar Tree Direct is growing in size and performance. Dollar Tree Direct provides an opportunity to broaden our customer base, drive incremental sales, expand brand awareness, and attract more customers into our stores.
In the fourth quarter, we significantly enhanced the functionality of the site's search feature on our website. Now when customers search for a specific product, it provided relevant and related content for the product, including videos, craft sheets, ratings and reviews.
Our Dollar Tree customers are crafty, savvy, frugal and connected, and this enhanced site search functionalities placed all those traits. Also, in Q4, Dollar Tree Direct introduced a new holiday Christmas section of our website. This section has provided a video, an interactive game and many great holiday craft and gift ideas.
Based on a number of customers both old and new that flock to the site, we know it was a big hit. We continue to leverage social media to connect with customers. A few examples of our growth includes our loyalty program, called The Value Seekers Club, which has grown nearly 80% over the past 12 months.
Our email subscriber database has grown 26%, and our Facebook fan base has increased by 31%. Social media continues to provide tremendous opportunities to communicate about exciting events and great products both in our stores and online.
Whether customers prefer to contact Dollar Tree Direct via their phones, their tablets, their laptops or their desktops, we're ready and able to connect with them. We continue to be very pleased with the growth of both sales and visitors to our Dollar Tree Direct business. Please check us out at DollarTree.com. .
Now I'll turn the call over to Kevin to provide more detail on our financial metrics and our initial outlook for 2015. .
Thank you, Bob. As Bob mentioned, our adjusted fourth quarter earnings increased 13.7% to $1.16 per diluted share. Once again, we are very pleased with another quarter of strong same-store sales. Our constant currency 5.6% comp sales performance was composed of a 5% increase in traffic and a 0.5% increase in average ticket.
Geographically, our performance was strongest in the Midwest and Southeast, as well as markets where we cycled significant weather disruptions from a year ago. In our previous 8-K, we announced our same store sales for the first 2 months of the quarter was 5.2%.
January was our strongest comp month of the quarter as we're cycling a large number of weather-related store closings from the prior year. .
we gained 30 basis points of leverage in occupancy and distribution costs resulting from strong same-store sales; we experienced higher initial markup and reduced markdowns across many categories. The higher IMU reflects continued improvement in sourcing and the flexibility of our merchandise model. Overall, merchandise mix contributed to margin rate.
However, it was offset by our commitment to provide greater value to consumers in order to drive traffic and capture share. We continue to be pleased with the results we are seeing. Freight cost as a percentage of sales increased, as domestic trucking rates were higher, reflecting the effects of industry-wide driver shortages.
The increase was partially offset by lower diesel cost..
Excluding acquisition-related costs, SG&A expenses were 21.3% of sales for the quarter, flat compared to the fourth quarter last year. Payroll-related expenses increased 25 basis points for the quarter as store bonuses, retirement plan contributions and incentive compensation increased based on the company's strong performance.
These are partially offset by reduced store payroll due to improved productivity and lower worker's compensation expenses. Store operating and corporate costs improved in the areas of utilities, repairs and maintenance, store supply, legal fees and depreciation, offsetting the payroll-related expense increase. .
Adjusted operating income increased $42.1 million compared to the fourth quarter last year, and adjusted operating margin improved 20 basis points to 15.8%. For full year 2014, our operating margin was 12.4%, consistent with last year despite persistent freight cost headwinds related to the domestic driver shortages in the trucking industry.
The tax rate for the quarter was 36.6% versus 37.2% in the fourth quarter last year. This decrease was due to the reenactment of the work opportunity's tax credit for 2014 in the fourth quarter. For the full fiscal year, the tax rate was 37.3% compared with 37.5% in 2013. .
Looking at the balance sheet, cash and cash equivalents at year end totaled $864.1 million versus $267.7 million at the end of fiscal 2013. Our consolidated inventory at year end was flat to last year, while selling square footage increased 7.4%.
Consolidated inventory per selling square foot actually decreased 6.9%, and our inventory turn improved 30 basis points to 4.4x for the year. We believe the current inventory levels are appropriate to support scheduled new store openings and our sales initiatives for 2015. .
The company uses the retail inventory method to assign costs to store inventories. In fiscal 2010, the company made an inventory accounting change for its U.S. operations going from one inventory pool to approximately 30. Effective February 1, 2015, the first day of fiscal 2015, the company will adopt the same method for our Canadian operations.
This change will facilitate improved decision-making, and further enhance our assortment planning process. The company expects to record a non-recurring, noncash charge to gross profit and a corresponding reduction in inventory at cost of approximately $3 million or $0.01 per diluted share for the first quarter of 2015.
This impact is included in our guidance. There will be no effect on prior periods related to this change in inventory accounting. .
Capital expenditures were $71.2 million in the fourth quarter of 2014. This compares with $46 million in the fourth quarter last year. For the full year 2014, capital expenditures were $325.6 million, which was below our prior expectation of $360 million to $370 million, and compares with $330.1 million in 2013.
For 2015, we are currently planning consolidated capital expenditures to range from $465 million to $475 million.
Capital expenditures are focused on new stores and remodels, including additional fee development stores, the addition of frozen or refrigerated capability to approximately 320 stores, IT system enhancements, the construction of a new Southeast distribution center and the expansion of our current Olive Branch, Mississippi distribution center.
Please note that upon completion of the Family Dollar transaction, we may reconsider our 2015 capital expenditure plan based on a comprehensive review of the combined distribution network and related capacity. .
Depreciation and amortization totaled $54.4 million for the fourth quarter versus $50.3 million in the fourth quarter last year. For 2014, total depreciation was $205.9 million, a 4 basis point improvement from last year. For 2015, depreciation and amortization is estimated to range from $215 million to $225 million.
Our initial outlook for guidance for 2015 includes the following assumptions. We anticipate that freight costs will continue to be a headwind to gross margin for the year based on continued pressure on freight rates. We are budgeting lower diesel fuel costs than a year ago.
As you have noticed, weather has presented early challenges throughout most of our Northern and Midwestern areas to this point in the first quarter. Easter will be 2 weeks earlier than the prior year, which represents an estimated $8 million headwind to sales. We are pleased to see agreement was reached last week in related to the West Coast ports.
We may continue to experience some product delays as the port congestion is relieved in the upcoming months.
The previously mentioned noncash charge of $0.01 per diluted share relates to the inventory accounting change, and we do not anticipate any share repurchases in 2015 and we cannot predict future currency fluctuations so we do not adjust our guidance for any potential changes in currency rates.
Our guidance also assumed a tax rate of 38.4% for the first quarter and 38.3% for the full year. Weighted average diluted share counts are assumed to be 206.9 million shares for the first quarter and 207.1 million shares for the full year. .
For the first quarter 2015, we are forecasting sales to range from $2.15 billion to $2.20 billion, and diluted earnings per share, excluding acquisition cost, in the range of $0.69 to $0.74 which would represent a 3% to 10% increase compared to the first quarter of 2014 earnings of $0.67 per diluted share.
The sales range implies a low- to mid-single digit comparable store sales increase and 6.9% square footage growth. Additionally, we have not included any acquisition-related cost in our first quarter guidance, as we cannot currently forecast the timing of when these costs will be incurred.
For the full fiscal year of 2015, we are forecasting sales in the range of $9.21 billion to $9.45 billion based on a low to -- low-mid-single digit increase in same-store sales and 7.2% square footage growth. Diluted earnings per share, excluding acquisition-related cost, are expected to range from $3.30 to $3.50.
This represents an increase of 6% to 12% over 2014 earnings per diluted share, excluding acquisition-related cost of $3.12. .
Before I turn the call back over to Bob, I did want to address one question that some of you expressed. Following the completion of the Family Dollar transaction, we will adopt segment reporting. This will provide you with the visibility into the performance of both Dollar Tree and Family Dollar on a standalone basis.
I will now turn the call back over to Bob. .
Thank you very much, Kevin. Before going to Q&A, I want to make a few comments on our pending acquisition of Family Dollar. I'll tell you that we're more enthusiastic about the transaction today than when we originally announced our merger agreement in late July.
We are extremely encouraged to see the overwhelming support from Family Dollar shareholders on their January 22 vote. Their approval was a crucial step in our moving forward with the transaction that will create a leading discount retailer in North America.
I am pleased that throughout the process, Dollar Tree remained committed to its strategy, and was able to gain shareholder approval without increasing our offer. I would like to personally commend Family Dollar's team members on their efforts over the past 7 months.
While their reported results have not been stellar, we acknowledge that they've been operating through unique circumstances with great uncertainty regarding the future of the Family Dollar business and we're eager to welcome Family Dollar associates to the Dollar Tree team.
We appreciate the dedication and efforts of Family Dollar's associates throughout the integration planning process, and we look forward to working together to further grow and improve the Family Dollar brand. .
The strategic rationale for this combination is powerful. We are combining 2 very large companies with more than 13,000 stores achieving almost $19 billion in sales, and more than $2 billion in adjusted EBITDA. We're combining 2 established and respected brands in the most economically resilient sector of retailing.
The discount retail sector has flourished through all economic cycles. We're combining 2 complementary business models across fixed and multi-priced strategies, creating the ability to serve a broader range of customers and geography.
The Dollar Tree target customers is largely a suburban customer, while the Family Dollar customer is largely urban and rural. We're combining complementary merchandise expertise, adding the Family Dollar strength and name brand consumable products to the Dollar Tree variety, seasonal and discretionary product and global sourcing power.
This combination generates significant immediate opportunities for operational improvement and near-term opportunities for synergies. We have identified the opportunity to realize at least $300 million in annual run rate hard cost synergies by the end of year 3. .
We have categorized these synergies into 4 primary categories and have ranked them in order of magnitude. First is sourcing and procurement.
Opportunities here will include lower cost of products through leveraging the size of our buys, rationalizing our vendor base, driving scale with common vendors, increasing direct-to-factory sourcing and increased efficiencies through global sourcing and the supply chain. Second is format optimization.
We will operate and grow both banners, and we plan to re-banner stores selectively to better match the brand to the market demographic, and to improve the productivity of the store. Most of the early re-bannering will be Family Dollar Stores to Dollar Tree stores. Next is reduced overhead.
Over time, we will reduce cost through shared services, reducing redundant public company and board cost and through systems integrations, and last, distribution and logistics through scale and operational efficiency. We expect to reduce inbound and outbound freight cost, both domestic and international. .
Additionally, primary areas of our initial focus will include, first of all, the customer. A focus on the needs of the value customer and delivering the merchandise assortment that serves their needs and their wants. This will include a mix of name brand and private label basics alongside variety and seasonally relevant product.
We will continue to return to EDLP and delivering value at competitive prices. Second, productivity. We will focus on improving sales per foot and inventory productivity by expanding high-performing categories and eliminating products that do not meet our sales and profitability threshold.
We plan to focus on the customer experience, and improving the table stakes by developing plans to consistently deliver the promise of a bright, clean and friendly store to shop. We will be tracking key metrics to monitor progress.
We plan to focus on reducing field management turnover and providing appropriate incentives to the people who directly serve our customers. We plan to improve our new store remodeling expansion performance with a keen focus on profitability, improvement and metrics and ROIC.
Overall, we will bring a disciplined approach to driving a key strategic initiative and a performance-oriented culture to the larger company through improved communications, analysis, collaboration and incentives.
We are confident that placing our initial emphases in these areas can materially enhance operating performance of the Family Dollar brand through improvements in sales, margins, expense control and greater customer satisfaction. .
I will tell you that both companies are ready to integrate. The lengthy delays through this process have afforded us a significant amount of time to focus on integration planning. Our integration management office is comprised of 10 functional teams that have detailed strategies, objectives and task with assigned milestones for achieving these tasks.
Our functional teams are dedicated to cost of goods sold, supply chain, indirect spending, merchandising, finance, human resources, information technology, general and administrative cost, including legal, internal audit and others, real estate and store operations.
Our team is incredibly excited about this transformational opportunity to grow our business for the long term by adding the Family Dollar banner to the Dollar Tree portfolio of brands.
As always, we will manage this business with a focus on what is best for our stakeholders, including our customers, our vendor partners, our associates and importantly, our long-term shareholders. .
Now back to Dollar Tree. As I previously mentioned, I'm extremely proud of the team's fourth quarter and full year performance, and I'm incredibly excited about Dollar Tree's future. The Dollar Tree business model is powerful, flexible and more relevant than ever, providing extreme value to customers while recording record level of earnings.
Our model has been tested by time and validated by history. For 7 consecutive years, quarter-after-quarter, Dollar Tree has delivered same-store sales increases of more than 1% every single quarter. Consumers are looking for value no matter the state of the economy. For 6 consecutive years, our annual gross margin rate has exceeded 35%.
At Dollar Tree, we are in control of our gross margin rate. It's all about the mix and having an extremely disciplined approach to sourcing product for our stores. We have consistently delivered solid margin rates through both inflationary and deflationary cycles. Our expenses are managed effectively, focused on overall returns.
And as a result of driving sales, managing margins and controlling expenses, we have delivered 5 consecutive years of double-digit operating margins that continue to lead the discount retail sector. We remain committed to the concept our customers love, and we are positioned for continued profitable growth for many years ahead.
We have a talented management team that has a long history of retail success, and importantly, with the addition of Family Dollar, we will be a bigger, stronger and more diversified business, better able to serve more customers and more markets with exactly what they're looking for, great value. Such a great time to be Dollar Tree.
Our inventories are clean and fresh. The shelves are full of the right product for the first half of 2015, and our values have never been better. .
Operator, we're now ready for questions. .
[Operator Instructions] And we'll take our first question from Michael Lasser with UBS. .
This is Max Aggrey, on for Michael Lasser. As we kind of look at the full year and your operating margin, you guys have performed pretty solid gross margins.
But as you're bringing on Family Dollar, how should we start to look at that, especially as you're going through the heavy lifting of the integration starting with banners and systems before we get to maybe some of the logistical synergies?.
Max, this is Kevin. Obviously, we're not at a point to specifically speak to those type of metrics at this point in time. I mean, as Bob pointed out, there is a lot of integration work being done.
The team's comprised of folks from both organizations working very hard, determining where the efficiencies can be gained and taking the best practices from both companies and looking at the way we can improve.
So obviously, when we talk about -- we've talked about the $300 million run rate synergies at the end of year 3, and beyond what we've said today, we're not really ready to say anything else as it relates to specific numbers of the ongoing combined organization. .
Okay. And also just with your online business, it seems like you guys have been doing a lot of great performance there with Dollar Tree Direct, and you mentioned that the demographics of that customer might be a little different.
Could you maybe expound a bit on that?.
Well, I think the demographics are Middle-America. It's people looking for value. It's -- in addition to that, it's small businesses, it's organizations that need larger quantities, that may need full-case quantities. Our average ticket on the online business is much higher. It's much higher than it is in our stores.
So it's really a broad swathe of Middle America with small business and organizations and schools and individuals that just may need a little extra for a party or to see the great value that we have.
In addition to that, Max, it's a terrific opportunity for us to connect with our customers directly, to understand who our customers are, to communicate through our Value Seekers Club to know who they are, what they want, what they want to buy, and to share with them our upcoming promotional events, what's new in our stores and just the Dollar Tree and Deal$ story.
So it's -- really, it serves both means to sell product, to serve the customer, and also to continue to drive on the Dollar Tree brand. .
And we'll take our next question from Anthony Chukumba with BB&T Capital. .
I guess my first question was could you give us a little bit of an update on Deal$? I mean, I know you mentioned that Dollar Tree Canada had its strongest comp yet, and I just wonder if we could get just a little bit more color on how Deal$ performed in Q4. .
Sure, I'll be happy to do that. We -- first of all, we end of the year with 219 Deal$ stores, and we don't break out our comps separately, but I would tell you that our comps were single-digit positive in our Deal$ stores.
As the trend has been, we have a merchandise mix of both consumables and discretionary products that does more consumable than discretionary in our Deal$ stores.
It's -- in the fourth quarter, of course with all of the holiday needs and all the holiday priority merchandise that we have in those stores, consumables were 56.4%, which is down a little bit. It's usually about 60%, and our non-consumables, up a little bit, 43.6%.
So because of the holiday, we're able to sell a little more discretionary and seasonal product in our Deal$ stores. The basket, the average ticket basket, when we had items that are greater than $1, it was $15.62 and more than half of all transactions, 52.3% had items greater than $1 in them.
So our customers are understanding the merchandise and are understanding the assortment. They're responding appropriately. Average unit retail, average retail of one item that they bought was $3.35 in our Deal$ stores, and the greater than $1 item represented 51% of the Deal$ total sales.
I will tell you that our strongest sales growth comps by category in the Deal$ business in fourth quarter were Christmas textiles, cleaning supplies, household plastics, had a terrific quarter, and our electronics department, driven by phone and tablet accessories did very well in the fourth quarter. .
Okay, that's really, really helpful color. And then just one quick follow-up, you mentioned the possibility of rebranding -- or I guess changing some Family Dollar stores to Dollar Tree and maybe even doing some vice versa.
I mean, what about Deal$, I mean, would you consider any -- changing any Deal$ locations to Family Dollar or Family Dollar locations to Deal$?.
I think so.
We haven't run those models yet, what -- as opposed to -- what we've done is we've taken the -- our real estate model and ran the Family Dollar stores through them to especially on the lower-performing Family Dollar stores to see how they would perform as a Dollar Tree, and we've -- that's been our first priority, was to take a look at the Family Dollar underperforming Family Dollar Stores that would perform better as Dollar Tree stores, but Deal$, certainly, Deal$ to Family Dollar, Family Dollars to Deal$, certainly could be a part of the future also.
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And we'll go next to Charles Grom with Sterne Agee. .
Just when we look at 2015, how should we think about the puts and takes on the gross profit margin front and looking at even maybe into 2016, at what point do lower energy costs start to help you guys out on the sourcing side?.
Chuck, I think, as we look at it in 2015, we've got -- thinking about the fact that as we've said, freight rates in general are going to continue to be higher for us in the sense that we took certain rate increases last year for certain distribution centers. We have some distribution centers this year that will take rate increases as well.
Obviously, the offset is -- a partial offset is the fact that diesel is, today, running roughly $2.90 versus running, I think, last year in Q4 it was about $3.85. So it is down significantly which is the help to offset it. I think we look at the fact that we want to continue to drive sales.
You've seen the -- we had some great success this year with investing in some brand products that -- our wow items to our consumers, the brands they know, brands that they love to be able to get at the dollar price point, and emergence has done a great job of sourcing those items and putting them in.
So I think we'll continue to look at that at driving sales. I think on an overall basis, next year, I think again at a low- to -- to low, mid-single digit comp, we expect to see a little bit of leverage on occupancy, as we have traditionally, in the last few years.
So I think, overall, depending on where freight comes out, I think we're looking at gross profit flat and to up or down 10 basis point is kind of the way we think about it. And again, it's always about managing through the business where there are items that our freights' up.
We got to find ways to offset that within our business model, and that's the way we're always thinking about it. .
Okay, that's great. And then just as a follow-up, in light of the Walmart news last week and even TJ Maxx this morning, I'm just wondering if you guys feel like you need to raise your wages for your associates to stay competitive, and if you factor any of that into your guidance for this year. .
Well, Chuck, we watch the industry trends carefully, and of course, we're compliant with all the state and federal regulations. But I'll tell you, outside of complying with the continued changes in the regulations, we've made no plans for a sweeping change to our minimum wage rates.
But we will continue to pay competitive wages, market by market, just as we always have done based on the prevailing rates. And as always, we'll work very hard to offset any wage increases and cost increases, in general, through increased sales and productivity enhancing initiatives that we've always been able to find. .
We'll go next to Matt Nemer with Wells Fargo Securities. .
First, there was a slight change in the language around your comp guidance versus the last few years. You've guided to low singles this year, a range of low single to low single to mid. Just wondering what drives the confidence in stronger sales growth this year if you could just point to the factors that drive that. .
Well, that's a very subtle change in the language, but I will tell you, we factor in -- as always, we factor in the guidance, especially the first quarter when you're looking out across a whole year of guidance, and you don't know what's coming at you, so you're always looking at what -- where the rocks in the road may be.
So you factor in what you know and what you could expect, and what possibly could happen, and you throw that against how you feel about the strength of the business and the momentum that you have going into the year and all the values that we know that we have planned, the promotions that we have planned.
So I will tell you that, I guess, you could read that, as we are excited about our business. I can tell you that first quarter initiatives are more exciting than probably they've ever been. You've heard me say that before, but there really is an excitement about our business, our Dollar Tree business as we look forward into 2015.
It's just the uncertainty out there. So what we've tried to do is sort of -- more than sort of.
We'll try to just describe to you all the factors that we consider to go into our guidance, and at the same time, we'll tell you that we are absolutely positioned, dead in the crosshairs of where the value customer, and they're all value customers now, but where the value customers is going, and we're more relevant than ever.
I can't tell you that I can -- I don't have any empirical data, but the wind feels a little bit to our -- back in the value sector right now with lower gasoline prices and lower energy prices and lower diesel fuel prices, and there's just a lot of lowers there that tend to help us as we accelerate our momentum going into the year.
That having said, we would be remiss if we didn't also point out the uncertainties that we see out there. So our guidance is our guidance. I'd like for you to believe it. I'd like for you to -- we have a -- I've always tried to earn credibility with our guidance and to factor in all that we know the best we can. .
We're happy to see the mid single comment in there.
And then just secondly, following up on gross margin, if we just isolate the freight-related components, Kevin, how do you think that, that will play out in terms of just the driver shortage versus the gas price benefit and then, I guess, versus any port delay cost this year if we exclude investments in wow brands, et cetera, how does that play out in 2015?.
I think just to give you some direction, so if we think about inbound and outbound rates, and then there's obviously the fuel component, the actual inbound and outbound rates are probably about 80% of the overall cost, with the fuel piece being about 20%.
So obviously, as we've talked about rates going up, fuel being a smaller piece, but going down, so realistically, if rates continue as we expect them, we will not be able to offset all of that rate increase with the fuel decrease as we see it right now.
So that's why we've said within the guidance, we project that we'll -- there is headwind from freight cost throughout the year. .
We'll go next to Paul Trussell with Deutsche Bank. .
This is Tiffany Kanaga, on for Paul. Would you update us on your long-term store growth potential as a standalone entity and also as a combined one? I know you outlined the thousand stores in Canada, but any additional color would be helpful. .
Well, we've always, for years and years, we've said 7,000 Dollar Tree stores, and I think that was probably if we were to update it today, we would say that that's probably on the low side, but 7,000 Dollar Tree stores in the U.S. Our Deal$ brands adds to that.
We've never quantified it, but our Deal$ brand is in addition to the 7,000 Dollar Tree stores. And in Canada, 1,000 Dollar Tree Canada stores is -- we feel very good about growing over time to 1,000 stores in Canada.
The combined growth, all I can tell you there, so far, since we have not closed on the Family Dollar deal is what's in the public documents out there that you've seen, as well as everyone else, I guess. And Family Dollar said, I think, 15,000 stores is their potential.
So if you take the 15 and add the 7 plus, the 1, 23,000 stores, sound like might be the right math on that. By the way, I think the combination of Family Dollar and Dollar Tree is -- I've said it before, it's complementary. One does not trump the other.
So we can continue to grow the Dollar Tree brand in addition to growing the Family Dollar brand at the appropriate pace over time. .
We'll go next to Dan Wewer with Raymond James. .
Following up on your comments on format optimization, do you think that the Family Dollar locations are sufficient, that they could generate the same type of sales and profit productivity as a Dollar Tree, and also, if this will give Dollar Tree an opportunity to start going into smaller markets that historically you sidestepped. .
Let me see if I understood the question, but what we've done on format optimization, we've taken the Family Dollar locations and we've run them through our real estate model, as if we were looking for a new Dollar Tree store, and our real estate model then predicts the success, the productivity of that store format.
We started with the lowest performing Family Dollar stores, I forget how many hundred, but it was hundreds, and we've run those through our models to come up with the initial number of stores that would benefit, we think, from moving from a Family Dollar brand to the Dollar Tree brand.
In other words, the stores would be more productive and more profitable likely because they serve -- they are more focused on the appropriate customer. Some of the Family Dollar Stores that moved into the suburban markets over recent years are in that group. They don't do quite as well in the suburban markets.
Dollar Tree does much better in the suburban markets. So that's how we looked at it. We haven't really looked the other way yet because until we close, we won't have access to all of that data on the Family Dollar side to be able to run the Dollar Tree Stores through the Family Dollar data but... .
But it's your thought that the underperforming Family Dollar Stores and suburban locations, Dollar Tree type locations, could generate the Dollar Tree profit metrics?.
Yes, that's right. That's exactly right. .
That's great because, I mean, there's a huge difference between the 2. Kevin, quick question for you. You talked about excluding acquisition costs and the guidance.
Does that include -- excluding the interest expense related to the acquisition?.
Yes, it is. So you would have seen, for example, in this quarter in the table, the income statement, you saw the -- in the adjustment column, there was $45.8 million of interest-related cost related to the financing that was excluded, so yes. .
And we'll take our final question today from Dan Binder with Jeffries. .
This is John Gugliuzza, on for Dan. My question is on SG&A. It was flat for the quarter despite the 5.6% comp increase driven higher -- by the higher incentive compensation. So we're a little bit surprised to see that.
As you guys look to next year, can you give us any guidance on where you see the comp leverage point, particularly in the fourth quarter?.
Yes, I think one thing I would speak to as it relates to the fourth quarter is the fact that if you look at the quarter we're comparing against last year, last year's comp, a year ago fourth quarter comp was 1.2%. So obviously, we underperformed.
Obviously, much of that was weather-driven at that point in time, but it affected the incentive compensation line items. It was a benefit basically to the P&L at the end of the day. This year, we obviously over-performed. So there is a dichotomy between the 2 quarters we're comparing at the end of the day from an SG&A standpoint.
So I think that's the biggest driver of why we see that. You would notice that, for the year, we still leveraged SG&A by 40 basis points for the year on our 4.3% comp. So I don't think the leverage point necessarily has changed overall as it relates to SG&A.
I think it was much more of a comparability issue year-over-year for that quarter as it relates to incentive-based comp. .
Okay, and then just one more question, another question on gross margin. Just regards to your strategy to invest more on merchandise, we were -- gross margin inched up a little bit this quarter.
So I'm just kind of wondering if there's been a little bit of a shift in the strategy or is it just a smaller kind of component of the movement in gross margin now.
How should we think about the -- your strategy in investing in merchandise going forward?.
Well, that ebbs and flows, but the -- what you saw there was a result of fourth quarter. Fourth quarter always has opportunities to show more value on higher margin products with more of the discretionary product. Our discretionary product grew at a little faster rate than our consumer product in the fourth quarter, for example.
So while we drove a terrific comp, we drove more of the comp with discretionary variety products. So that's a good thing.
But I wouldn't read anything on to the annual numbers, as we've always had the strategy of as we got better cost or better prices, reinvesting some of that, not taking it straight in the gross margin, but reinvesting it to more value for the customer and that's what you see when you see the consistency of our gross profit over the years.
So no change in the strategy. I think what you see in there is just the fourth quarter effort and initiative.
Are there any more questions?.
And that does conclude today's question-and-answer session. At this time, I'd like to turn the conference back to Mr. Randy Guiler for any additional or closing remarks. .
Okay, and I just want to remind everyone that the guidance that we're providing for 2015 does not include any share repurchases. And thank you for joining us on today's call and for your continued interest in Dollar Tree. Our next quarterly earnings conference call is scheduled for Thursday, May 21. .
Again, that does conclude today's presentation. We thank you for your participation..