Good day, and welcome to the Dollar Tree, Inc. Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Randy Guiler, Vice President, Investor Relations. Please go ahead, sir. .

Thank you, Rochelle. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the second quarter of fiscal 2015. Participating on today's call will be our CEO, Bob Sasser; our CFO, Kevin Wampler; and Family Dollar's President and Chief Operating Officer, Gary Philbin. .

Before we begin, I would like to remind everyone that various remarks that we will make about future expectations, plans and prospects for the company constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors included in our most recent press release, most recent current report on Form 8-K, quarterly report on Form 10-Q and annual report on Form 10-K, which are all on file with the SEC.

We have no obligation to update our forward-looking statements, and you should not expect us to do so. Unless otherwise noted, all margin, net income and earnings comparisons presented today exclude the impact of the Family Dollar Stores acquisition and integration-related costs for the second quarter and year-to-date.

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 results for the second quarter of fiscal 2015. With the closing of the Family Dollar transition -- transaction on July 6, this is our first sales and earnings report for the combined companies.

This report includes 1 month of Family Dollar sales and operations combined with a full quarter of Dollar Tree performance. All Family Dollar stores are reported as new stores. .

In the Dollar Tree segment of our business, same-store sales on a constant currency basis increased 2.7%. This is on top of a 4.5% increase in second quarter of last year. Sales growth was driven by increases in both traffic and average ticket, with traffic increasing the most.

Adjusted for the impact of Canadian currency fluctuations, the same-store sales increase was 2.4%. .

Total sales at Dollar Tree stores for the second quarter grew 8.3% to $2.2 billion. This was at the midpoint of our previously announced guidance of $2.17 billion to $2.23 billion.

Adjusted operating income increased by $22.4 million or 10.5% to $234.9 million, and adjusted operating margin for the quarter improved 20 basis points to 10.7% compared to 10.5% from the prior year second quarter.

Adjusted net income for the Dollar Tree segment increased 10.1% to $138.9 million, and adjusted earnings per diluted share increased 9.8% to $0.67 compared with second quarter 2014 adjusted earnings of $0.61 per diluted share. This was near the top end of our previously announced guidance of $0.63 to $0.68 per diluted share. .

I'm extremely pleased with the consistent growth and strength of the Dollar Tree business. This was our 30th consecutive quarter of positive same-store sales. Second quarter results continue to validate the relevance of the Dollar Tree brand. Customers are shopping with us more often. We're attracting new customers every day.

And when the customers are in the store, they're buying more. Both traffic and average ticket increased for the quarter. .

Dollar Tree continues to be part of the solution for millions of consumers as they strive to balance their household budgets. We serve a very loyal and growing customer base. Our commitment is to continue serving our existing customers better while taking every opportunity to gain new customers in every store every day.

Our merchants do a great job sourcing product that exceeds customer expectations for what $1 can buy at a cost that fits our margin requirements. And our store teams are focused on providing a clean, full, fun and friendly shopping experience.

Our merchandise values are better than ever, and our operating margin continues to lead the discount retail sector. .

picnics, pools, beaches and Summer Fun. Reflecting the seasonal strength of Mother's Day and Memorial Day, May was the strongest month for comp store sales in the quarter. For the full quarter, same-store sales increased as the result of growth in both basic consumables and discretionary products.

Top-performing categories include candy and food, party, snacks and beverage and household supplies. .

Geographically, Dollar Tree same-store sales growth was the strongest in the Southwest followed by the Midwest, Southeast, Northeast and West Coast. All 5 geographic zones produced positive same-store sales in the quarter.

We continue to invest in our customers by offering unbelievable values on many name brands and Bonus Buys, especially in our food, snack, beverage and household supplies. .

And not to forget the basics. Throughout the quarter, we continue to highlight our million-dollar brands with signage and special displays of those everyday items that provide terrific value to our customers. .

Looking forward, the Dollar Tree segment is positioned for increased relevance to our customers, sustained growth and improved profitability. We have multiple opportunities to continue growing and improving our business through opening more stores and increasing the productivity of all of our stores. .

In the second quarter, we opened a total of 130 new stores and relocated or expanded 27 stores for a total of 157 projects. The new stores included 121 U.S. Dollar Tree stores, 3 Dollar Tree Canada stores and 2 Deals stores. Additionally, on August 1, we hosted grand openings at the first 4 of our rebannered Family Dollar to Dollar Tree stores.

Total Dollar Tree square footage increased 7.8%. We ended the quarter with 5,583 stores, and we're on track with our plan for fiscal 2015, which includes 400 new stores, 75 relocations and expansions for a total of 475 projects across the U.S. and Canada. .

category expansions, where customers are realizing more value as we rationalize and expand assortments in pet supplies, hardware, health care, beauty and eyewear as well as home and household products; seasonal relevance, our storefronts change with the seasons. At Dollar Tree, we want to own the seasons at the $1 price point.

Merchandise energy and the thrill of the hunt throughout the store. At Dollar Tree, you'll always find an unexpected value. And being first-of-the-month ready, we place special emphasis on basic, consumable core items at the beginning of each month when many customers are shopping for basic needs. .

Additionally, we're continuing the expansion of our frozen and refrigerated category. In the second quarter, we installed freezers and coolers in 159 additional stores for a total of 255 additional stores year-to-date. We currently offer frozen and refrigerated products in 3,875 stores, and we continue to grow.

Frozen and refrigerated merchandise is generally lower margin, but it's faster turning, more frequently purchased and the increase in shopping frequency provides Dollar Tree the opportunity to drive incremental sales across all categories, including our higher-margin discretionary product.

Most importantly, the product serves the needs of our customer. .

We continue to support planned growth by building infrastructure and distribution capacity ahead of the need. We recently began construction of Dollar Tree DC #11, a 1.5 million square-foot, automated facility in Cherokee County, South Carolina.

This facility will provide capacity and increased efficiency to support continued profitable store growth in the Southeastern and Mid-Atlantic U.S. We plan to have the facility operational in third quarter of 2016. .

I'm extremely pleased with our company's accomplishments in second quarter. Our Dollar Tree business continues to deliver operating margins that lead the value retail sector. Our customer base is large and growing. Both traffic and average ticket increased in second quarter.

We have an experienced and talented merchandising team that continues to do a tremendous job of finding and delivering terrific values to our customers with margins that meet our thresholds. In second quarter, merchandise margin increased over the prior year.

We announced and began construction on Dollar Tree DC 11, and we completed the acquisition of Family Dollar, immediately transitioning from integration planning to integration execution of the 2 companies. We have an incredible opportunity ahead of us as a combined organization.

I am more enthusiastic than ever about the opportunity this merger presents for our customers, our suppliers, our associates and our shareholders. With the successful completion of the acquisition of Family Dollar on July 6, we are now a much larger and more diverse organization, able to benefit from scale and deliver even greater values.

With more than 13,800 stores across North America, supported by a solid and scalable infrastructure, this combination provides the unique opportunity to leverage our multiple banners to better serve a broader range of customers while enhancing our ability to deliver long-term profitable growth for our shareholders. .

sourcing and procurement; our rebanner program for optimizing store formats; distribution and logistics; and fourth, overhead and corporate SG&A. As previously stated, we expect to spend approximately $300 million in onetime costs to achieve these synergies. .

Our priority areas of focus for Family Dollar will be on, first of all, the customer, we will be evolving the merchandise assortments to increase value and better meet their needs; the customer experience, creating a more exciting, inviting and customer-friendly shopping environment; lowering field management turnover; supporting our store initiatives and developing a more performance-based culture throughout the company and increasing store productivity.

We will be modifying assortments to improve sales and inventory productivity in existing stores while improving new store remodel and expansion performance. .

Our 100-day action plan includes 7 key initiatives. First of all, communicating organizational leadership changes and establishing management cadence and coordination.

As planned, effective on day 1, Gary Philbin, my business partner for the past 15 years, took over as President and Chief Operating Officer at Family Dollar, and Mike Witynski was promoted to the role of Chief Operating Officer at Dollar Tree.

Immediately, we began standing up workgroups and establishing a weekly and monthly cadence of cross-banner meetings. We began defining coordinated merchandise planning and buying across banners. We are consolidating reporting and financial management tools.

We've created a stub-year plan to align the Family Dollar calendar with the Dollar Tree retail calendar by the end of the year. We're developing a combined real estate review and approval process.

Our goal is to put the right banner in the right location to best serve the customer and to ensure we're using an appropriate pro forma analysis with appropriate hurdle rates for profitability.

We are completing our compensation and organization leveling review, bringing both organizations to a common title hierarchy with a common compensation and benefit plan and a common calendar. .

Second, we immediately kicked off plans and processes to capture sourcing and procurement synergies. One of our largest synergy opportunities is using our size, scale and efficiency to buy better. We currently spend about $10 billion on items for resale and another $3 billion for products and services we buy for use in the business.

Immediately following closing, our merchandising teams met to share detailed cost information to identify and quantify specific opportunities and to develop a strategic action plan to obtain the best cost in both banners. .

The "cost of goods sold" initiative is focused in 3 primary areas. The first area is aligning exact match products carried by both companies and obtaining the lowest cost for both banners. Second is a review of similar match products. Here, our merchants are aligning specifications and combining purchasing power to reduce cost.

Third is payment term parity, which will benefit the combined company with savings from harmonizing payment terms. The plans have been developed. The initiative has launched and we're well on our way to achieving our goals of reducing cost of goods sold. .

Additionally, our procurement teams are addressing our indirect spend. These are items and services that we buy that are used in the business. The opportunity to use our size and efficiency to reduce cost is significant.

These items and services have been grouped into waves to be addressed over time through a blend of negotiations, options, RFPs and formal bid processes. This process has also begun, and we're on track to achieve our first 100-day goals. .

Third, we have officially kicked of our store rebanner process. We are very excited about the opportunity to rebanner store locations to better serve our customers while improving the overall productivity of these individual stores. Our initial focus will be transforming hundreds of underperforming Family Dollar stores into Dollar Tree stores.

Using the Dollar Tree real estate model, we're reviewing underperforming Family Dollar stores to determine if they would perform more profitably as Dollar Tree stores. .

Upon closing, we immediately began the process to rebanner 4 test stores. The test was to validate that we had all the necessary steps in place to facilitate a smooth conversion.

The individual stores close for approximately 2 weeks as we liquidate the Family Dollar merchandise, convert the decor, signing and fixtures, train the store teams and bring in the Dollar Tree inventory. These first 4 test stores reopened on August 1, less than 4 weeks following the completion of the acquisition.

While very early in the process, these stores experienced successful grand openings as Dollar Tree stores. We have since rebannered and opened 39 more for a total of 43 stores as of last Friday, August 28, with similar grand opening results.

Going forward, we've developed a list of stores to be rebannered each week through the end of October, and assuming continued success, we will reengage these efforts in 2016. By the end of October, we expect to have more than 150 stores converted. We're very pleased with the process and with the early results.

Feedback from customers in these markets has been positive. .

Fourth, in the first 100 days, we plan to establish cross-organizational IT access and finalize our initial technology integration strategy. Both Dollar Tree and Family Dollar have very good technology platforms, and there are no significant gaps or immediate needs.

Through our integration planning, we've developed a road map to strategically combine our technology over time. The timing of these changes will be driven by the size of achievable synergies versus the expected cost. .

Our current plan or road map includes 4 primary phases. Immediately in Phase 1, we're addressing back-office system consolidations. Phase 2 addresses system alignment related to transportation, workforce and HR support and business intelligence. Phase 3 addresses consolidation of core merchandising systems, including forecasting and replenishment.

And Phase 4 addresses projects related to distribution center management, point-of-sale and real estate. .

Fifth, we're developing and initiating plans to better serve the Family Dollar customer and to build sales momentum. Raising the table stakes is a key priority and a significant opportunity in our integration efforts. Our first 100-day plans include clearing aged and nonproductive inventory while improving our in-stock position on everyday basics.

This includes reclaiming prime space for impactful displays for our fourth quarter seasonal and promotional assortment and continuing the analysis of productivity by category. .

Sixth, we will be finalizing the supply chain road map and initiating the multi-banner supply chain project.

Working with a cross-banner functional team and third-party supply chain consultants, we're developing plans for integrating our warehouse management systems and making plans to rationalize the fleet of combined DCs, analyzing our space need by banner and determining our ability to ship both banners out of each facility.

This is a very large product -- project with a very significant opportunity for long-term synergies. .

Seventh, we're further developing and initiating plans to reduce costs with a shared services model. Over time, we will be combining our efforts to support both banners with a shared service organization in human resources, finance, information technology, logistics, legal, strategy and audit.

Our goal is to provide consistent, efficient support of our business initiatives across the combined organization while reducing costs. .

This is a high-level overview of some of the components of our 100-day action plan. There are some quick and easy wins here and some that will take a great deal of work. The timing of some will be dependent on our IT integration.

Our strategy is not to touch everything at once but to prioritize our areas of focus to get it right the first time and build the overall business for the long term. It is a process. It will take time, but the size of the prize is worth it. .

Now I'll turn the call over to Kevin to provide more detail on our financial metrics and our outlook for 2015. .

Thanks, Bob, and good morning. As Bob mentioned, we were pleased with our overall performance for the second quarter. The Dollar Tree segment performed well within the range of guidance that we provided.

As a result of the acquisition, year-over-year comparisons for the next 4 quarters will be more complex than normal since there's no prior year data for the Family Dollar segment. .

Total sales for the second quarter grew 48.3% to $3.01 billion, which includes 4 weeks of Family Dollar sales. Excluding the $812 million in Family Dollar sales, the Dollar Tree segment sales increased 8.3%. Same-store sales on a constant currency basis increased 2.7% versus a strong 4.5% in the prior year second quarter.

The increase was driven by both traffic and ticket. Adjusted for the impact of Canadian currency fluctuations, same-store sales grew 2.4%. Please note that all of the recently acquired Family Dollar stores and newly rebannered stores are considered new stores and are not included in our same-store sales calculation. .

Gross profit for the combined organization increased by $161.1 million or 23.2% to $855.2 million for the second quarter of 2015 compared to last year's quarter. The majority of the dollar increase was driven by Family Dollar's gross profit of $105.9 million.

A few factors to note are, as a result of the purchase price allocation for the acquisition, a preliminary purchase accounting adjustment of $116.3 million was recorded for the step up in basis of Family Dollar inventory to its fair value.

Of this amount, $55 million is amortizable, of which $11.1 million was amortized during the second quarter to cost of goods sold and negatively impacted gross margin results. We expect an additional $38.1 million will be amortized to cost of goods sold over the remaining 6 months of 2015. .

During the second quarter, we also took a $60 million markdown reserve for SKU rationalization and planned liquidations related to Family Dollar inventory that will not be carried going forward. Gross profit margin for the Dollar Tree segment was 34.1% during the second quarter compared with 34.2% in the prior year second quarter.

The 10 basis point decline as a percent of sales was driven by higher shrink in occupancy costs, partially offset by improved merchandise costs. .

Selling, general and administrative expenses in the quarter for the combined organization increased 49.7% to $731.8 million from $489 million in last year's second quarter.

The majority of the $242.7 million increase related to $200.9 million of Family Dollar expense, which included $6.5 million for the amortization of favorable lease rights recorded in connection with the acquisition and $6.5 million of additional depreciation for the harmonization of the combined company policies.

For the second quarter, we incurred $17.7 million or 55 basis points of expenses related to the Family Dollar acquisition compared to $7.5 million or 35 basis points of acquisition expenses in the second quarter of 2014. .

As a percent of sales, SG&A expenses increased 20 basis points to 24.3% in the second quarter from 24.1% in the same quarter last year. Excluding acquisition costs, SG&A expense as a percent of sales was consistent with the prior year at 23.7%. Adjusted SG&A expense for the Dollar Tree segment was $514.4 million or 23.4% of sales.

As a percent of sales, this represented a 30 basis point improvement compared to the second quarter of 2014 adjusted SG&A expense for the Dollar Tree segment of 23.7%. The decrease was driven by improved store labor productivity, lower incentive comp and lower legal fees as a percent of sales.

Operating income for the combined organization decreased to $123.4 million compared with $205 million in the same period last year. This decrease is a result of lower gross profit margin and higher SG&A expenses, as previously mentioned. .

a $1.7 million expense due to an unfavorable fair market value adjustment on diesel fuel swaps; a net interest expense of $263.9 million in the quarter compared to $8.4 million in the prior year second quarter.

This increase included interest on the long-term debt for the acquisition, an $89.5 million breakage fee related to the prepayment of the Dollar Tree senior notes and a $39.5 million prepayment fee related to the Term Loan B refinancing; a $17.4 million write-off of original issue discount; and a $5.9 million write-off of deferred financing cost related to the Term Loan B refinancing.

The quarterly run rate for interest expense going forward will be approximately $100 million, including deferred financing cost amortization. .

For the second quarter, the company had a net loss of $98 million or $0.46 per diluted share. Excluding acquisition-related adjustments, the company had net income of $53.5 million or $0.25 per diluted share. .

Adjusted net income for the Dollar Tree segment was $138.9 million or $0.67 per adjusted diluted share, a 9.8% increase when compared to the reported adjusted earnings per share of $0.61 per diluted share in the prior year second quarter.

Our effective tax rate for the second quarter was a benefit of 31.1% compared to an expense of 38.2% in the prior year quarter. The decrease was primarily the result of the pretax income loss in the second -- in the quarter and the nondeductible acquisition costs. .

Looking at the balance sheet and statement of cash flow. Combined cash and cash equivalents at quarter end totaled $1.3 billion compared to $467.7 million at the end of the second quarter of 2014. Inventory for the Dollar Tree segment at quarter-end was 6.7% greater than at the same time last year, while selling square footage increased 7.8%.

Consolidated inventory per selling square foot decreased 1%. We believe that current inventory levels are appropriate to support scheduled new store openings and our sales initiatives for the third quarter. Consolidated capital expenditures were $100.1 million in the second quarter of 2015 versus $88.3 million in the second quarter of last year. .

For the full year 2015, we're planning for consolidated capital expenditures to range from $600 million to $615 million.

Capital expenditures will be focused on new stores and remodels, including additional few development stores; rebanner of select Family Dollar stores to Dollar Tree stores; the addition of frozen and refrigerated capability to approximately 425 Dollar Tree stores, up from the previous expectation of 320; IT system enhancements; and the construction of our new Cherokee County, South Carolina distribution center.

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Depreciation and amortization totaled $89.5 million for the second quarter versus $49.9 million in the second quarter last year. For 2015, we expect consolidated depreciation and amortization to range from $470 million to $490 million.

This range includes increases over the traditional run rate of depreciation and amortization expense for Family Dollar for 2 items.

First, it includes $46 million of depreciation above the historical run rate for Family Dollar as a result of harmonizing the depreciable lines accounting policies of the 2 companies and the increase in the value of assets based on the purchase price allocation.

Secondly, it includes $45 million for the amortization of favorable lease rights for the purchase price valuation of Family Dollar leases. .

For the third quarter, we are forecasting total sales to range from $4.78 billion to $4.87 billion. For the full year of 2015, we are now estimating total sales will range from $15.3 billion to $15.52 billion. Both of these estimates are based on low single-digit same-store sales increase.

Weighted average diluted share counts are assumed to be 235.7 million shares for Q3 and 223.5 million shares for the full year. .

Our expectations for the Dollar Tree segment of our business in the back half have not materially changed from our original expectation as we entered the year.

However, as a result of the recently completed acquisition, the significant integration initiatives and the divestiture process, we are not providing earnings per share guidance for the third quarter or full year at this time. .

I would like to reiterate that our same-store sales calculation excludes recently acquired Family Dollar stores and excludes stores that are rebannered from Family Dollar to Dollar Tree. We will experience some degree of cannibalization to Dollar Tree comps as part of our rebanner efforts.

This cannibalization expectation was planned and factored into both our rebanner strategy analysis and our outlook for same-store sales in the back half of 2015. .

in addition to losing the operating income associated with these 330 stores, we also expect to incur $5 million to $10 million in transaction closing costs and setup costs related to transition services.

Over a period expected to be no more than 24 months, we will be providing certain support and transition services and expect to be reimbursed by the buyer for these direct operating costs and support services. .

I will now turn the call back over to Bob. .

Thank you, Kevin. It's an exciting time for Dollar Tree. The strategic rationale for the Family Dollar acquisition is more compelling than ever. This is an extremely large and complex transaction involving more than 13,000 retail store locations and 23 distribution centers, the largest of any previous retail merger, and it will take some time.

It is early in the integration process, and I'm more enthusiastic than ever about the long-term opportunity to provide substantially increased shareholder value. .

We have great confidence in our opportunity and ability to achieve at least $300 million in annual run rate synergies by the end of year 3. These synergies will be achieved through a combination of lowering costs in both direct and indirect sourcing, banner optimization, logistics and overhead.

We will employ a disciplined approach to driving key strategic initiatives to the combined organization through improved communication, analysis, collaboration and incentives.

We're confident that in placing our initial emphasis in these areas, we can materially enhance operating performance of the Family Dollar brand through improvements in sales, margin, expense control and greater customer satisfaction. .

Before we go to Q&A, I'd like to introduce Gary Philbin to our call. Effective immediately upon closing, Gary took over as President and Chief Operating Officer at Family Dollar. This is a key role that had been vacant for about 18 months, and the organization was in need of direction and leadership following the lengthy acquisition process.

Many of you already know Gary. We've worked together, improving and growing the Dollar Tree business for the past 15 years, and I have tremendous confidence in his ability as a retailer and as a leader.

Gary?.

Thank you, Bob, and good morning, everyone. First, let me say we are only 8 weeks into the integration, and we are enthusiastic about the initial progress and this incredible opportunity ahead of us. I'm pleased with the dedication and focus of the entire Family Dollar team.

As you know, Family Dollar's a well-established brand that has been successful for more than 50 years. I think our FD, Family Dollar business, is not broken. We simply need to roll up our sleeves, focus on what's important, and we have work to do to polish up this well-known brand. .

Bob provided a high-level strategic overview of our 100-day action plan. I would like to provide greater detail into the execution components and our areas of focus on improving the Family Dollar's customer shopping experience. .

great product value, well-run stores, smart choices for our customers and consistency of in-stocks on everyday items. Nothing I said here is new to retail. This is really Retail 101. We are focused on consistent execution, combined with a relentless focus on our customer.

It's important to understand that we will be making investments to improve what we refer to table stakes, and these investments will include delivering on the consistency of a clean-store benchmark, catching up on deferred maintenance, investing in the right amount of payroll to drive both productivity and enhance the customer experience and improving the overall efficiency of our in-store processes.

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Importantly, we are kicking off a process to clear non-go-forward merchandise in the stores. So you're likely to see clearance activity over the next couple of months as we gear up for having our shelves stocked with basic, everyday items and to show off our great seasonal product.

This will have an impact on margins near term, but it's absolutely the right thing to do for our business in the long term. .

Before I turn the call back over to Bob, I just want to say again, I'm proud to be part of the Family Dollar team. I am pleased with the work being done, and I'm excited about the opportunities this will present, both for our vendor community and our Family Dollar team members as we improve and grow the Family Dollar brand. .

Now let me turn it back over to Bob. .

Thank you, Gary. I want to close the prepared remarks by saying that the Dollar Tree business model is powerful, flexible and more relevant than ever, providing extreme value to customers while recording record levels of earnings. Our model has been tested by time and validated by history.

For 30 consecutive quarters, Dollar Tree has delivered positive same-store sales increases. Through good times and difficult times in all retail cycles, consumers are looking for value no matter the state of the economy. While our price point remains $1, our operating margin continues to lead the discount sector. .

great value in every store every day. And we have many years of growth ahead of us. Over the past 3 weeks, I've had the privilege to attend and present at both Family Dollar's Annual Leadership Conference and Dollar Tree's annual field management meeting. I could not be more proud of our combined organizations.

Our field management and our leadership teams are talented, experienced, energized and incredibly motivated. .

Operator, we are now ready for questions. .

[Operator Instructions] And our first question, we'll hear from Scot Ciccarelli with RBC Capital Markets. .

Scot Ciccarelli. A couple of things, can you help us better understand the moving pieces on the Family Dollar side? It looks like even after adjusting for the charges, Kevin, that you outlined, gross margins were dramatically lower than their historical run rate.

So whether it's kind of giving us year-over-year comparable figures or a way to kind of build up a bridge to what might be kind of a run -- go-forward run rate number. .

Yes. I think the big thing we got to keep in mind is there are some geography differences in the way we have historically reported our gross profit and the way that the Family Dollar has. So you got to remember, within our gross margin, we have occupancy and distribution costs up there.

So within -- that change has been made to Family Dollar's reporting on a go-forward basis, so that's probably the biggest difference that you would see from a comparability standpoint from where it -- from what it traditionally had been reported as, Scot. .

Okay. And then I would like to follow up on that. And then also, as you guys kind of think about Family Dollar, maybe this is for Gary, it's obviously been an underperforming asset for the last couple of years. It sounds like you guys have a lot of kind of go-forward opportunities to fix the business and deep into the plans.

But when you think about the profitability opportunity of that entity on a stand-alone basis, do you guys have some sort of kind of medium-term or a long-term profitability target for the Family Dollar segment?.

Scot, thank you. I would just say this. We know the synergy piece that we're working on, and this is going to be a bit of a marathon, not a sprint. But the same things that we've talked about over the years at Dollar Tree play pretty nicely into Family Dollar. And I would just go back to some of the basics we're working on.

We are walking the assortments in the store 4 feet by 4 feet to get the assortment right. We are taking a look at store operations to understand how do we improve the processes that drive productivity. We're going to take a very hard look at all of our expense lines so that we can fund those things so we can invest in the customer experience.

So it's really just connecting the same dots you've heard us preach over the years here at Dollar Tree, and those are going to be the levers we push to drive to the bottom line. .

Scot, I would just like to add, too, that the -- you've mentioned the short term versus long term. And I will tell you, this is -- we're going to manage this in the short term, but it's the long-term vision that I'm really excited about. It wasn't that long ago that Family Dollar's margins were in the 8% and higher range, operating margin.

And certainly, those are in the -- in our near-term sites over the next few years. In the long term, there are others in the sector that are operating at 11%, 12% operating margin.

I don't think the operating margin will be as high as the Dollar Tree operating margin because of the nature of our business, the nature of our consumable versus nonconsumable and discretionary business. But certainly, it can be up there amongst others in the discount value sector. .

So Bob, just to clarify.

Did you say you would expect or believe you can get the Family Dollar business to kind of an 8% margin over the next few years as you guys integrate it?.

I'll just say that it wasn't that many years ago that it was at that. So certainly, one of our first goals is to get it from where it is now up to where it has been in recent years and then pass that.

There's no reason why we can't polish this thing up and get it back to its proper place, which would be up there at the top with others of the same type business. .

And next, we'll move to Stephen Grambling with Goldman Sachs. .

I think previously, you had mentioned a low to mid-single-digit accretion to cash EPS in the first year from the acquisition. So I guess it would now be fiscal '16.

Is that still on the table? Or has anything changed in your thought process as you've been able to maybe open the kimono a bit?.

As we look at that on a go-forward basis, we stated that back in July of 2014. Obviously, things took obviously a lot longer to close the deal than would have been expected when we made that. The Family Dollar business deteriorated a little bit over that time frame, but time will tell. We don't think it's not possible. There's a lot of moving pieces.

I think the other thing you got to remember is, long term, we're really more worried about what the acquisition does for the long term, so we'll have to see. I don't exactly know today, but we'll be there. There's a lot of moving pieces.

Obviously, we spoke to a lot of things today about some of the short-term effects from a purchase accounting standpoint, some of those things. Again, some of those are noncash. Some of those do go through the P&L as a regular charge. So a lot of moving pieces, and that's what makes it as complex as it is as we go forward from a comparison standpoint. .

Okay. And I guess one other clarification just on the Family Dollar business.

Is there anything you can talk to in terms of the underlying health and trajectory of that business and how that's factored into the sales plan for the year?.

As we looked at it from a sales perspective, as the Family Dollar team looked at that business, I think it's really consistent with the guidance we gave of a low single-digit comp gain. That's really for the Dollar Tree side because the comps -- the Family Dollar stores are not comped.

But I think in the back of our mind, there's no reason why they can't in a sense focus and perform at a level like that going forward. So I mean, I think that's just kind of general nature. We expect improvement. Obviously, we've got to go through some processes.

We talked about the fact that $60 million reserve to clean up the inventory for nongo-forward items. So it'll be a process there. We hope that, that obviously opens up shelf space as we go forward for the seasonal goods as we go into the fourth quarter and other items that we believe are important to the assortment as we go forward.

So a lot of work being done, a lot of moving pieces. .

Good luck in the back half, looking forward to seeing that 8% margin. .

Not in the back half. .

And we'll move on to Matt Nemer with Wells Fargo. .

Given your comments about the product value that you're looking to install in the FDO stores, I'm wondering if you think that the FDO merchandise margins need to be structurally lower than they have been in the past. .

I'll say that I don't know that it's -- that it need to be structurally lower. I think it's all about the assortment to some degree, serving that value customer. A lot of things go into that. First of all, being competitive on name brands, same -- for same items between our company and others. We need to do that, as always.

That's just sort of one of the table stakes. And past there, it's about the mix. It's how do you create value, especially for that low-income customer. There's a big opportunity with private label. There's a big opportunity for control label. There's a big opportunity for product development to create even more value for that low-end customer.

So as we speak of serving a low-end customer and bringing value to that customer, there's more than one way to do it, and it's not all about price on name brand products. It's, in many ways, about understanding that customer, giving them what they need. Sometimes, it's a lower retail item. That doesn't speak to the margin, though.

It speaks to the opening price point for that customer. So no, I won't tell you that I expect Family Dollar margins to be lower because we're serving the value customer. I think it's all about the way we bring value to that customer. .

Okay, that's helpful. And then just a quick follow-up.

Could you talk to the stability of the FDO store managers and the field teams now that you're kind of into the integration process?.

We actually had a chance. Timing is everything, but we had a chance to, with Bob and myself, get in front of the entire district manager leadership team at the beginning of August. So we had a great opportunity of laying out the elements that are important to us and what we need a short-term focus on as we head into the holidays.

So it was really a great opportunity to talk about what we need to do. And of course store manager turnover is on our radar and something that we need to improve at Family Dollar. And so those issues and elements were laid out in front of the entire group. I would tell you that they're encouraged, they're positive, they're enthusiastic to move forward.

And I think that's going to carry over to the stores. And clearly, some of the things that we're going to invest in over time in the facilities and address issues that make us more productive are the types of things that benefit store managers. So I'm encouraged.

I think our folks have taken the opportunity and are going to carry it forward for us, and I would expect to see improvement on store manager turnover, which does a lot of good things for us over the long term. .

And next, we'll move on to Michael Lasser with UBS. .

So aside from some of the inventory dynamics that you mentioned, what else is going to impact your outlook from a profitability perspective in the second half of the year? Because I think it is complex and the fact that it is being less so open-ended may offer the impression that there's too many moving pieces for even the company to project.

So how can the investment community be expected to forecast profitability?.

Well, I think, in Gary's prepared remarks, he touched on some of the items, as you think about the moving pieces, that are still under consideration when you think about the fact that we've only truly been under the hood for 8 weeks.

But Gary talked about investments in a cleaner store and the benchmarks appropriately, cleaning up deferred maintenance and making sure the stores are taken care of appropriately and determining what the right level of payroll is in this model to drive productivity and create a more profitable store at the end of the day.

So there's still a lot of moving pieces just from the integration side. And then you have -- as well, as I said, you have timing on the divestiture process side as well. At some point in time, these 330 stores will be -- that are currently included in our base will go away. And then we also have costs around that to help support that, as we said.

And so the timing of those costs are not as able to be tied down maybe as tight at this moment as we'd like. So there is a lot of moving pieces. I think we know what they are, but it does create a little more uncertainty in creating a number. I mean, we've taken great pride in being able to provide credible guidance, and that's important to us.

And we want to make sure that we have the best information to make this -- to be able to make that and give that you at the end of the day. .

So my follow-up is going to be a 2-part follow-up. Based on those comments, it sounds like the prior guidance for core Dollar Tree remains relatively intact on a profitability side.

And the guidance -- or your commentary on the guidance also suggests that core Dollar Tree is probably going to do a 1% to 1.5% comp in the second half of the year to get to a low single-digit comp for the year. And it also sounds like that's what it did in June and July based on what you're indicating that May had done.

So my question is, a, core profitability for Dollar Tree impact; and b, why might you be expecting a 1% to 1.5% comp for core Dollar Tree moving forward.

And is that what we should expect longer term?.

So look, you are correct on the core Dollar Tree profitability. As I said in my prepared remarks, our viewpoint on really the guidance we gave for Dollar Tree, the most updated guidance would have been at the end of Q1, really, hasn't materially changed from that point in time. Our view on the world has not really changed.

As it relates to your question on comp, obviously, we don't give a specific range by number value, but low single digit is a wider range than 1.5%. So I don't know that we would expect a 1.5% at the end of the day. So I think that would be how I would answer that question. .

And next, we'll move on to Dan Wewer with Raymond James. .

Bob, I know that there's a lot of science involved in determining locations for Dollar Tree stores.

When you look at the Family Dollar stores that have been selected for conversions, how would you characterize the quality of their locations by Dollar Tree standards? And do you think their stores have the potential to generate the same sales per square foot and operating margin rate than an average Dollar Tree store achieves? Or would you expect these converted stores to be somewhat below Dollar Tree profit standards?.

Dan, I would tell you that, first, the Family Dollar site locations, I think that they've got good site locations. Some of them, they're a little off the mark, and they're underperforming for that reason. As you know that over the past few years, I think they opened up a few more in suburban locations than may be normal.

I don't know that -- what normal was. But it seemed like, and what I've been told, is that they were aiming more at suburban locations. We see more suburban locations.

And as we run those lower-performing stores, we're finding some of those rural and suburban locations that are underperforming that when we run through our model, they turn out to be good Dollar Tree stores. And good Dollar Tree stores meet our Dollar Tree criteria for opening a new Dollar Tree store.

These are not -- these are sites that we would open as a Dollar Tree new store and we've been looking at those locations. So what we're taking is the lower-performing stores. They're either lower performing because they're maybe a little off the Family Dollar mark.

They're lower performing because maybe the model, the pro formas, weren't exactly aligned. And by the way, with our Dollar Tree margin, we can make a lot of money in a location. Our margins are much higher than the Family Dollar margins. Our mix of product is much different than the Family Dollar product.

So a long answer to your question, but these are -- we're looking at these being good Dollar Tree stores. We're taking the lowest-performing and the low-performing Family Dollars, converting them into good Dollar Tree stores. Some of them are going to be breakout home runs, amongst the best of our Dollar Tree stores, on a sales per foot.

And some of them are likely going to be underperforming the first year. I believe that the breakout home runs will outweigh. We're early in this, but I believe that breakout home runs will outweigh the underperformers and that most of them are going to be right there in the middle hitting whatever we expected from a Dollar Tree store.

It's only been a few weeks. We've only had some grand openings so far. But I will tell you, I'm pleased with the grand openings. And I visited the first 4 test stores when we opened them. I visited all 4 of them, and they look like Dollar Tree stores and they look like Dollar Tree locations and they're in Dollar Tree towns.

Customers were pleased to see our Dollar Tree open up in the place of the Family Dollar. So I'm expecting it to be at least as good as a Family -- as a Dollar Tree new store. .

Just as a follow-up question. After the acquisition was first announced, seems like 10 years ago, but you talked about the opportunities of better buying leverage from common vendors, but it really wasn't until after the closing on July 6 that you were able to study the Family Dollar purchasing file, if I'm correct.

Did it turn out that the buying leverage would be greater than what you have been talking about over the last year? Or did it turn out both companies were very effective in buying and maybe there's not going to be as much upside as anticipated?.

Yes. I think it's at least as good in the near term, and I think there may be even more opportunity in the long term. And where I'm coming from, as we -- we sort of knew in the near term, and we got very quickly to that exact match number.

That's just a matter of running the finals and seeing which items are exactly the same and what's the -- who's paying the lowest price, right? I mean, somebody's paying -- you're either paying the same or somebody is paying a lower. If you're paying lower then we believe that both of us deserve that lower cost.

So that was pretty much as we thought it would be. The big, I think, power going forward, in addition to that, is going to be into the like items. Not exactly the same items, but they're close. It may be a private label item that we compare to, and specs are a little different.

So by aligning the specs and putting that out for bid, if it's a basic item, we think -- we know we can drive some more value by combining our buying power of these 2 large businesses on those, and through product development, just leveraging our buying power to develop product for our stores, whether it's Dollar Tree or Family Dollar or both.

So huge opportunities continuing on the buying side. The near term is the exact match. The near match or the close match, like items, I guess, is taking a little bit longer, but may even be a bigger part of the synergy as we go forward. And then not to forget all the things that we buy that we don't sell.

We just buy them in expense items and services and things that we buy to use. That's about $3 billion that we have to work with, and every dollar we save on expenses drops right straight to the bottom line. .

Just a real quick question.

Do you intend going forward to continue breaking out the Dollar Tree core business separately as you did in the second quarter?.

We will try to give color. We are -- if you look at the Q, there is segment reporting. Even in the press release, there's segment reporting. So we will report on 2 segments. We'll have the Dollar Tree banner, and we'll have the Family Dollar banner.

So we will have segment reporting going forward, so we'll give you a good idea of how things are performing. .

And next, we'll move on to Paul Trussell with Deutsche Bank. .

Bob, you just spoke a bit to buying power and the opportunity there.

Can you just clarify for us, on the merchant team, are those merchants still staying separate? And also, how should we think about the category mix within FDO? Or should we expect meaningful changes there? And then lastly, on that same point, as we think about the cadence of the $300 million in synergies, can you help us with what's a prudent assumption for year 1? And what is the main driver of those year 1 synergy?.

Yes, Paul. The -- first of all, the buying teams are staying separate. We have a terrific Dollar Tree buying team that understands and is focused on delivering tremendous value to our Dollar Tree customer for $1 price and at margins that we're pleased to have.

We have, at Family Dollar, a separate team focused on that lower-income customer, the needs-based customer, more of a consumer product customer. 70%-ish, something like that, is consumer products. So the buying teams are staying separate. We're connecting them over -- at the top through merchandise managers and divisional vice presidents and that area.

We're coordinating or buying with vendors. We're coordinating the activities on items and -- comparing buying plans and merging those as we go onto buying trips, as we go to Asia, as we go to market in, wherever it is, New York, going to shows and that kind of thing.

So a lot of coordination, but we -- I believe it's very important to keep the focus clearly on the Family Dollar banner. We intend to continue opening up Family Dollar stores as well as Dollar Tree stores.

Sometimes, they're pretty close to each other, so I'd like to be able to do that and have a difference in the banners when you walk inside, have a difference in the merchandise assortment. So the merchandise assortment at Family Dollar is evolving. It will be changing, as we discussed -- as I've discussed in the past.

The synergies, I think we've said in the past it's 25% of the synergies in the first year. We think we can get up to 75% of them by the end of the second full year and then 100% by the end of 3 full years. So that's something like, what, 75, 150, 75, something like that. 150 additional in the second year. So 75, 225 and 300 if you look at it that way.

The early synergies are across the board. There are going to be a lot of sourcing and procurement. There will be some in banner optimization. I've said that we're going to do over 150 banner -- new -- rebannering stores this year. So that's a real number. Overhead, we're working through that in every segment of our business.

Some of that's going to be driven by our information technology integration. Some of it requires the integration of the technology, for example, in logistics. The ability to ship both banners out of every building is going to require a lot of technology help. So that will be probably later in the process.

Earlier in the process are the things about overhead and improvements in SG&A through better -- more efficient procurement and through buying power. .

That's very helpful. And just quickly, going back to Dollar Tree stand-alone, and I think Mike Lasser touched on this earlier.

But could you just help us better understand the revision in the same-store sales guidance from the low single-digit to low mid-single-digit to now, I think, just low single-digit guidance for the full year? What's the nature of that revision? And if you can give us some understanding on the cadence of the comp through the second quarter and any early comments on back-to-school.

.

I can give you a little color on the cadence on the comp side. As I initially said in the prepared remarks that May, driven by a couple of terrific holidays, Mother's Day and Memorial Day, you have that seasonal energy, that holiday excitement. So that drove the highest comps for us. June wasn't far behind. July was running pretty much consistent.

We did lose a first of the month to a end-of-July week. So some of that business slipped forward. Anytime the first of the month follows on the weekend, then the checks come out in a different cadence, in this case, versus last year. It all came out -- the first and the third came out last year. This year, only the first checks came out.

So there was a little slide in that final week of July. But overall, it was fairly consistent through the quarter. And again, every time there's a great holiday, we have a lot of energy in our Dollar Tree stores and you see more traffic and you see more sales from the holiday. Back-to-school started well. It's not over.

One of the things that we're experiencing as well as all of retail, I guess, right now is Labor Day is a week later. Labor Day drives a lot of things in the retail business. It drives seasonal sale at sort of the end of the summer, I guess. The pools close end of the summer for retailers and for customers. And that's when a lot of the school starts.

Some schools run year round, I realize, some start at different times. But still, a large percentage of schools start after Labor Day. Well, that's a week later this year. So the sales cadence on our back-to-school looks good, but we still got to -- haven't finished with back-to-school yet. So we'll be finishing that up this weekend.

It should be terrific weekend in our Dollar Tree stores. If you have one near, drop in, you'll see a lot of sidewalk sales and summer excitement and all that goes with ending the summer season as well as getting ready to go to back to school. .

And we'll move on to Meredith Adler with Barclays. .

Is there anything -- when you look at Family Dollar, I know you said that the delay in getting the deal approved kind of put a little pressure on Family Dollar and made it a little softer.

But is there anything that you've seen that comes as a surprise, specifically, a negative surprise? And I guess I would go back to the question that was just asked. It does seem like your guidance for the second half for Dollar Tree's comp is a little bit softer.

Is there anything -- is that right, softer than what it was? And is there anything you would point to that would explain why you feel that's going to be the case?.

So Meredith, as you look at the -- people seem to be a little hung up at the moment on this comp guidance. I would tell you that the total sales related to Dollar Tree for the year have changed an immaterial amount within the guidance compared to where they were a quarter ago.

So the one thing we did state in our prepared remarks was the fact that there is some cannibalization from the rebannered stores, and we are, as Bob said, doing over 150. So there is some cannibalization we'll feel from those, and that may make us round down from a mid-single digit to a low single digit.

But I mean, on an overall basis, as I said, we have not materially changed the way our view is on the Dollar Tree business for the back half. .

Good. That is what I was thinking you were saying, but people didn't seem to be hearing it. Maybe you could just comment on, then, Family Dollar.

Is there anything that has surprised you, either positive or negative, since you've really gotten into it?.

that's investing in some labor, that's investing in some store facilities. Those are big projects for us, and so we are going to be measured and disciplined and very prescriptive on how we do that.

And that's really the effort that we're putting together now to really lay out a time line on how we can do the things that show customers it's a better shopping experience because we have better in-stocks, we have a better facility and we have team members engaged the way we'd like.

And that's really just the nuts and bolts of retail, and it's what we're focused on week in, week out, down at Family Dollar right now. .

And we do have time for one more question. Next, we'll hear from Dan Binder with Jefferies. .

It's Dan Binder. Just going back to the sales plan for a minute. I was wondering if you could give us a little bit of color on how disruptive it is when you close the stores, have to convert them. It's 4 weeks it sounds like is kind of what you're -- it was recently.

Is that what you're planning for the balance of the year on the stores that are remaining? And then with the Family Dollar -- within the Family Dollar business, I realize you're not reporting the comp today for their period.

But I was curious, when you think about the go-forward plan, kind of what's that underlying organic growth that we're assuming shorter term?.

with the 4 that we rebannered, that we started immediately after we closed July 6. We had them completely rebannered and open within 26 days. So 30 days is kind of what we're aiming at. Basically, we close and we go through a process ahead of time where we're selling through and liquidating the Family Dollar inventory.

We then close down for about 2 weeks -- 2 more weeks to remerchandise the store, get the rest of the merchandise out of there, get the old fixtures out and get the new fixtures in if there are any needed, not always. Sometimes, we're using the same fixtures. Get the new sign packages in, the new decor package and remerchandise the store.

So it's about a 1-month process. Now some of it starts ahead of time because we've identified the stores now ahead of time, and we know which ones we're going to do by month. So we do have a preclosing clearance sale.

Gary?.

Dan, just for the first 4 stores, because we could not start markdowns until we closed the transaction, they were accelerated. And so the stores that we've identified in the future have a -- give us a longer runway to appropriately do the markdown. So the first 4, the only difference was we had to do this in a very short window.

The teams were able to accomplish that, and we got to the finish line. You will see a more measured time line on the markdowns in the future. .

There's another part of the question, I'm trying to... .

The other part of the question was sort of the organic growth for Family Dollar stores as we think about the full year guidance. .

We -- I will tell you that they were positive in July. Comped positive in July, but they're new stores. So it's less of a comp story now and more of a productivity story. And obviously, we're going to be going through a lot of changes in the remainder of the year. We're so excited about cleaning up the stores.

We're so excited about going through the process of rationalizing the assortment, getting rid of old and aged inventory and then replacing that, the space that's opened up from that, with new seasonal product, new promotional product, new high-value product in the stores and what that will do for the customers.

In this all-important fourth quarter, we want our customers to see something different. Gary, would you like to... .

Well, the short term is, for us, just to get very clearly in front of cleaning up some of the old, nongo-forward merchandise so that we can have merchandise on end caps and the best seasonal impact as we can going to the important holiday season.

From the standpoint of store growth, initially, there was a number out there around 550 on Family Dollar for their fiscal year. Appropriately, that dropped down to about 300. So we have slowed down store growth as we take a look under the hood, take a look at the assortments to drive sales per square foot.

I'm sitting in on every real estate meeting to identify, really, what's the strategy, where is it working or do we need to recalibrate.

And so we'll take a look on both sides of that ledger, where does Family Dollar work best, and really, more than anything, how do we find the right compelling assortments and our operational initiatives to drive higher sales productivity. .

And then just as a follow-up, can you give us a little more color on how many stores you ultimately plan to convert? And as you go through this integration, slower Family Dollar store growth makes sense. I'm just curious as you think about the next 2 years beyond this year. I think you just said 300 for this year.

What would that -- what would you anticipate that to look like?.

Dan, it's 150 -- more than 150 this year. It's as many as we can get done between now and the end of October. Obviously, we want to stop at that point and pay attention to our fourth quarter business, and then we'll pick up again next year. I have really not quantified the total number because there is still work in progress there. It's hundreds.

I've said it's hundreds, and I believe it's hundreds of stores that will have the opportunity. There's -- the analysis is ongoing. As we go through more analysis, we'll get more firm direction. The 150-plus number for this year was a new number for you.

But as far as how many for next year, we'll share that as we get a little more certainty on the locations and where those are going to be. .

Yes. That was really sort of a 2-part question. I'm sorry if I confused you. I was -- the 300, I was talking about new store openings for Family Dollar. I was just curious what that would look like during the integration period as you consider growth for the Family Dollar format next year and the third year. .

Well, obviously, we pull back until we can get our more productive new store model and more productive merchandise assortment in the stores. We don't want to be investing and opening a lot of new stores until we know that we're going to have what the model is and it has great success. So in the near term, we pull back.

As Gary described, we'll pull back to -- when I say pull back, from peak numbers that Family Dollar has done. Next year will be a pull-back year also. Past that, I think we've got to say that as we get more confidence in the new model, we'll ramp it back up. It's there to be done. There's plenty of room for the Family Dollar stores.

We're excited about what we can do with it. We just need this time for the rest of this year and probably next year in order to get confidence that the new model -- now we'll open up stores, but it won't be the peak numbers that we've seen in the past. But we need a little confidence that the new models are going to hit the pro formas. .

And that will conclude today's question-and-answer session. At this time, I would like to turn the call back over to Mr. Randy Guiler for any additional or closing remarks. .

Thank you, Rochelle, and thank you for joining us for today's call and for your continued interest in Dollar Tree. Our next quarterly earnings conference call is scheduled for November 24. Thank you, and have a good day. .

And that will conclude today's call. We thank you for your participation..