Good day, and welcome to Dollar Tree, Inc.'s First 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, Lauren. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the first quarter of 2016. .

Participating on today's call will be our CEO, Bob Sasser; 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. These are included in our most recent press release, most recent 8-K, most recent 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. At the end of our prepared remarks, we will open the call for 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 first quarter of fiscal 2016. Total sales for the quarter increased 134% to $5.09 billion. And same-store sales on a constant currency basis increased 2.3%, driven by increases in both traffic and average ticket.

Adjusted for the impact of Canadian currency fluctuations, the same-store sales increase was 2.2%..

Total sales results were at the midpoint of our range of guidance. Operating income increased 80% to $418.7 million. Net income for the quarter increased 235% to $232.7 million. And earnings per share increased 188% to $0.98, which exceeded the high end of our first quarter range of guidance by $0.15..

I'm very pleased with our company's accomplishments for the first quarter. Sales were solidly within our range of guidance. SG&A expenses across both banners were well-managed. Our Dollar Tree segment operating margin improved 60 basis points to 11.8% for the quarter, and our Family Dollar segment first quarter operating margin improved to 5.1%. .

Diluted earnings per share of $0.98 were $0.15 above the top end of our range of guidance. Excluding a $0.09 benefit from our lower-than-planned tax rate for the quarter, earnings per share were $0.89, which exceeded the top end of our range of guidance by $0.06 per share. .

Looking ahead, we have an incredible opportunity to increase shareholder value as a combined organization. Our integration of Family Dollar is on schedule, and the strategic rationale for the combination is as compelling as ever.

As progress on our retail operation continues, there's an increased enthusiasm for the opportunity this merger presents to grow our business and to serve more customers in more ways..

We are employing a disciplined approach to building the foundation for long-term improvements and the customer experience at Family Dollar, and we remain confident in our ability to capture synergies for the combined organization.

With a focus on managing our business in real time, we're developing the foundation for a larger, stronger and more diversified business that will generate cash and build shareholder value for years to come..

Accomplishments continue to grow in the first quarter. In the Dollar Tree segment, sales increased 9.5%, and same-store sales on a constant currency basis increased 2.3%. Sales increased as the result of growth in both basic consumables and discretionary products and through increases in both traffic and average ticket.

Top-performing categories included household products, candy and food, snacks and beverage and party supplies. Geographically, Dollar Tree same-store sales growth was strongest in the Mid-Atlantic, followed closely by the Midwest and the Northeast. .

I'm pleased with the consistent growth and strength of the Dollar Tree business. This represented our 33rd consecutive quarter of positive same-store sales. Cycling comp's up 3.4% last year, and through a volatile period for retail, our first quarter results again validate the relevance of the Dollar Tree brand.

Customers are shopping our stores more often, and we continue to attract new customers every day. And when these customers are in the store, they're buying more. Both traffic and average ticket contributed to our comp growth. .

Dollar Tree continues to be part of the solution for millions of consumers as they work hard 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 merchant teams continue to do a terrific job sourcing products that exceed customer expectations for what $1 can buy at a cost that meets our margin requirements. Merchandise margin increased in the first quarter. .

Our store teams are focused on providing a clean, full, fun and friendly shopping experience. Merchandise values at Dollar Tree are better than ever. .

Seasonal energy was high throughout the quarter, beginning with Valentine's Day. In addition to party essentials, our stores were well-stocked with cards, gifts, gift bags, balloons, party supplies and candy for that special person. Seasonal sell-through was good, and stores quickly and efficiently transitioned to St. Patrick's Day and Easter..

The red seasonal displays from February quickly turned green in early March with hats, necklaces, socks and party supplies in preparation for St. Patrick's Day.

And for Easter, our customers found jellybeans, Easter bunnies, fashion accessories, chocolate candy, baskets and basket stuffers, everything necessary to build colorful, cost-effective Easter baskets for the kids..

We continue to invest in our customers by offering high-value product.

In addition to the seasonal energy in the first quarter, our 30-year anniversary event emphasized unbelievable values on many name brand Bonus Buys, especially in our food, snack, beverage and household supplies, tremendous values and all priced, as it has been for the past 30 years, at just $1 per item. .

And not to forget the basics throughout the quarter, we highlighted our million-dollar brands with signing and special displays of these every day items that provide great values to our customers, especially to meet their spring cleaning and spring decorating needs.

We ended the quarter with our inventory clean, well-balanced, seasonally relevant and stores prepared for Mother's Day, Memorial Day and Summer Fun..

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 businesses through opening more stores and increasing the productivity of all of our stores. .

In the first quarter, we opened a total of 112 new Dollar Tree stores. We relocated or expanded 25 Dollar Tree stores. We rebannered 126 Deals stores to Dollar Tree stores. And we rebannered 3 Family Dollars to Dollar Tree stores for a total of 266 Dollar Tree projects during the quarter. .

Total Dollar Tree banner selling square footage increased 10.4% compared to the prior year, and we ended the first quarter with a total of 6,049 Dollar Tree stores across North America. .

Dollar Tree and Family Dollar..

Category expansions. Customers are realizing more value as we rationalize and expand assortments in pet supplies, hardware, healthcare, beauty and eyewear, as well as home and household products. Number two, a fun and enjoyable shopping experience with a focus on seasonal relevance. Our storefronts change with the seasons.

At Dollar Tree, we want to own the seasons at the $1 price point. Number three, creating merchandise energy and the thrill of the hunt throughout the store. At Dollar Tree, you always find an unexpected value. And number four, 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..

We're expanding our frozen and refrigerated category. In the first quarter, we installed freezers and coolers in 118 additional Dollar Tree banner stores. We currently offer frozen and refrigerated product in 4,405 stores and growing. Our plan is to expand frozen and refrigerated to 400 additional stores in 2016..

We continue to support planned growth with infrastructure and appropriate distribution capacity ahead of the need. I'm pleased to announce that construction on our newest DC -- that would be Dollar Tree DC #11 in Cherokee County, South Carolina, was completed on schedule and on budget.

This 1.5 million-square-foot automated facility will provide capacity and increased efficiency to support continued profitable store growth in the Southeast and Mid-Atlantic regions of the U.S. We are currently receiving product at this facility and will begin shipping to stores from this new facility this quarter. .

Additionally, to support continued growth in Western markets, we are expanding our Stockton, California distribution center from 525,000 to 820,000 square feet. This project is nearing completion..

And we're making meaningful progress in the Family Dollar banner. Less than 1 year into our integration, the stores are cleaner, the shelves are better stocked, we've cleaned up old inventory and the end caps are more compelling and relevant. The feedback we're receiving has been positive.

Our customer satisfaction scores have improved, validating that customers are taking notice. .

For the quarter, the Family Dollar banner delivered a low single-digit positive comp store sales increase. The same-store sales increase was driven by increased traffic, partially offset by a slight decline in average ticket.

Same-store sales increased in both discretionary and consumables at the Family Dollar banner, with slightly higher comp sales growth in discretionary. .

The strongest sales increases by month were in February and March, reflecting the Easter shift. Geographically, comp store growth was led by the Northeast and Mid-Atlantic. .

For the first quarter at Family Dollar, we opened a total of 59 new Family Dollar stores, and we relocated or expanded 41 Family Dollar stores for a total of 100 projects. During the quarter, we rebannered Family Dollar stores -- 3 Family Dollar stores to Dollar Tree, and 6 others were in the process of conversion at quarter-end.

Additionally, 9 Deals store locations were converted to Family Dollars. We ended the first quarter with 7,948 Family Dollar stores. .

We're well on our way to achieving our announced Family Dollar store growth of 200 new stores in 2016. .

At quarter-end, we had a total Family Dollar and Dollar Tree combined store count of 13,997 stores across North America..

As in Dollar Tree stores, our primary areas of focus for Family Dollar stores are on the customer, the shopping experience and value creation. Merchants and stores are working hard to be first-of-the-month ready and weekend-ready.

We're paying special attention to opening price points, national brand pricing and the role of private label products while rationalizing SKUs for increased productivity and a focus on basic in-stock levels. We're pleased with the initial reception and the traction we're gaining with our smart ways to save initiatives.

Our goal is to communicate value to our customers. The key elements of smart ways to save are a combination of every day low-price items, strategically planned sales and price drop promotions, incredible $1 wow items and a continually enhanced assortment of name brands, private label, name-brand equivalents and value brands.

We're pleased with the Family Dollar traffic trends we experienced in Q1. To win back our Family Dollar customers' confidence and frequency of visit, we are committed to improving their shopping experience..

store cleanliness, product assortment, customer service and speed of checkout. Continued improvements in each of these metrics will contribute to Family Dollar reestablishing itself as the convenience store of choice for our customer shopping trips. .

We will manage investments in table stakes with the same disciplined approach that we have used at Dollar Tree for many years, identifying and paying special attention to the customer-facing metrics with a focus on return on investment and productivity enhancement while reducing costs, leveraging shared service and back-office functions and reinvesting some of these savings in the customer.

As we have done at Dollar Tree, we will test and learn, and we will invest prescriptively while measuring return on our investments. And as always, our P&L will continue to be managed line-by-line, quarter-by-quarter with a keen eye on ROI. Our quarterly guidance will reflect our updated expectations. .

one, sourcing and procurement; two, our rebanner program for optimizing store formats; three, distribution and logistics; and four, overhead and corporate SG&A. At this stage, we are clearly on track to achieve our first 12-months milestone of at least $75 million in run rate synergies. .

Now I'll turn the call over to Kevin to provide more details on our first quarter financial performance and our updated outlook for the second quarter and for the full year 2016. .

Thanks, Bob, and good morning. .

Total sales for the first quarter grew 134% to $5.09 billion, which includes our third full quarter of Family Dollar sales. This was at the midpoint of the sales guidance range of $5.05 billion to $5.12 billion. .

Dollar Tree segment total sales increased 9.5% to $2.38 billion, while Family Dollar segment total sales decreased 1.8% to $2.70 billion. .

Year-over-year sales comparisons for Family Dollar were impacted by rebannered stores and divested stores..

Same-store sales on a constant currency basis increased 2.3% versus 3.4% in the prior year's first quarter. The increase was driven by both traffic and ticket. .

Adjusted for the impact of Canadian currency fluctuations, same-store sales grew 2.2%. All acquired Family Dollar stores and newly rebannered Family Dollar and Deals stores are considered new stores and are excluded from our same-store sales calculation. .

Gross profit for the combined organization increased 108% to $1.55 billion through the first quarter of 2016 compared to the prior year's quarter. The majority of the $805.7 million increase was driven by Family Dollar's gross profit of $733.8 million. Gross profit for the Dollar Tree segment increased 9.6% for the quarter. .

Gross profit margin for the Dollar Tree segment was 34.4% during the first quarter, flat compared with the prior year's first quarter.

Factors impacting the segment's gross margin performance during the quarter included lower merchandise cost due to favorable freight cost, higher shrink as a result of unfavorable physical inventory results, higher distribution and occupancy cost as a percentage of net sales and cycling the onetime, $2 million, noncash charge from the prior year related to a change in the inventory accounting method for our Canadian operations.

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Gross profit margin for the Family Dollar segment was 27.2% during the first quarter compared with 25.8% in the comparable period last -- prior year. Excluding the $6.3 million of inventory step-up amortization, gross profit margin was 27.4% for the quarter.

The improvement of 160 basis points on a comparable basis was driven by improved mark-on, favorable freight costs and improved shrink, partially offset by higher distribution and occupancy costs..

Selling, general and administrative expenses in the quarter for the combined organization increased 120% to $1.14 billion from $516.1 million in last year's first quarter. The majority of the $619.8 million increase related to $595.8 million of Family Dollar expense. .

Q1 SG&A expense for the Dollar Tree segment as a percent of sales was 22.6%; a 110-basis-point improvement compared to the prior year's quarter. The prior year's quarter included $10.4 million of acquisition-related cost.

Excluding the prior year's cost, SG&A improved 60 basis points compared to the adjusted 23.2% of sales for the prior year's quarter.

This improvement was driven primarily by payroll-related costs, including lower incentive compensation, health insurance and profit-sharing expense; and improved store operating costs as a percentage of sales related to lower utility costs. .

SG&A expense for the Family Dollar segment as a percentage of sales was 22.1% compared to 20.8% in the prior year's quarter. The current year includes $18.7 million for favorable lease rights amortization and $7.8 million in additional depreciation for useful life and fixed asset revaluation.

The prior year's comparable period included $8 million of acquisition-related costs. Excluding these costs, SG&A expense increased 60 basis points as a percent of sales to 21.1% from 20.5% in the prior year.

The increase was primarily driven by increased payroll and incentive compensation, advertising costs and repairs, partially offset by lower business insurance costs and lower utility costs. .

Adjusted operating income, excluding acquisition-related costs for the Dollar Tree segment, increased $37.5 million to $280.7 million. As a percent of sales, adjusted operating income improved 60 basis points to 11.8% compared to 11.2% of sales in the prior year's first quarter. .

Adjusted operating income for the Family Dollar segment increased $24.8 million to $170.9 million. The year-over-year comparison was impacted by rebannered stores and the divestiture of 325 Family Dollar Stores.

As a percent of sales, adjusted operating income increased 100 basis points to 6.3% compared to 5.3% of sales from the prior year's comparable period..

Nonoperating expenses for the quarter totaled $87.1 million, comprised primarily of net interest expense of $87.3 million in the quarter. Our effective tax rate for the first quarter was 29.8% compared to 38.6% in the prior year's quarter. Our Q1 guidance was based on an expected tax rate of 36.6%.

The decrease was primarily attributable to a onetime benefit in state tax expense related to the fair market value of assets acquired from Family Dollar, in addition, a tax benefit from adopting ASU No. 2016-09 related to stock compensation accounting and an increase in work opportunity tax credits in relation to income for the quarter. .

For the first quarter, the company had net income of $232.7 million or $0.98 per diluted share. This includes an approximate $0.09 benefit to Q1 EPS from the lower-than-anticipated tax rate. Excluding this onetime tax benefit and the prior-year quarter acquisition-related costs, diluted EPS improved by 25.4% to $0.89 from $0.71..

Combined cash and cash equivalents at quarter-end totaled $929.7 million compared to $736.1 million at the end of 2015. Our outstanding long-term debt is approximately $7.5 billion..

Inventory for the Dollar Tree segment at quarter-end was 18.4% greater than at the same time last year, while selling square footage increased 10.4%. Inventory per selling square foot increased 7.2%. The primary contributor to the year-over-year increases in inventory levels relates to the West Coast port disruptions we experienced a year ago.

We believe that current inventory levels are appropriate to support scheduled new store openings and our sales initiatives for the second quarter. .

Inventory for the Family Dollar segment at quarter-end increased 2.2% over the same period last year, increased 5.9% on a per selling square foot basis. We are pleased with the progress we are seeing on in-stock levels on key items.

We are continuing to review merchandise assortments and believe our current inventory levels are appropriate for the second quarter. .

Capital expenditures were $175.9 million in the first quarter of 2016 versus $66.9 million in the first quarter last year. For fiscal 2016, we are planning for consolidated capital expenditures to range from $650 million to $670 million.

Capital expenditures will be focused on new stores or remodels, including 3 [ph] development stores, our rebanner initiatives, the addition of frozen and refrigerated capability to approximately 400 Dollar Tree Stores, IT system enhancements and integration projects and our distribution center projects. .

Depreciation and amortization totaled $162.3 million in the first quarter. This includes purchase accounting-related costs of $18.7 million for favorable lease rights amortization and $7.8 million of depreciation for useful life and asset revaluation. Depreciation expense was $52.8 million in the first quarter of last year. .

For fiscal 2016, we expect consolidated depreciation and amortization to range from $630 million to $640 million. This range includes increases over the historical run rate of depreciation and amortization expense for Family Dollar for 2 items, which are included in our guidance.

First, it includes $5 million for Q2 and $13 million for fiscal 2016 of depreciation above the historical run rate for Family Dollar as a result of harmonizing the depreciable lives accounted policies of the 2 companies and the increase in the value of the assets based on the purchase price allocation.

Secondly, it includes $18.7 million for Q2 and $74 million for fiscal 2016 for the amortization of favorable lease rights for the purchase accounting valuation of Family Dollar leases..

Our updated outlook for 2016 includes the following assumptions. Our same-store sales calculation excludes Family Dollar stores and excludes stores that are rebannered. These stores will be included in our same-store sales calculations when they have been owned by Dollar Tree or opened as a Dollar Tree for 15 months.

We will continue to experience a higher-than-normal degree of cannibalization to Dollar Tree comps as part of our rebanner efforts. This cannibalization expectation was planned and factored into our rebanner strategy analysis and our outlook for same-store sales. .

Remaining inventory step-up amortization will be approximately $2 million in Q2. We have budgeted lower diesel fuel and import freight costs than a year ago. Interest expense will be approximately $90 million per quarter in 2016. We do not anticipate any share repurchase in 2016.

And we cannot predict future currency fluctuations, so we have not adjusted our guidance for changes in currency rates..

Please note that our fiscal 2016 outlook does not include any adjustments related to the recent FLSA announcement regarding changes to overtime regulation. The rule change affects a relatively small percentage of our workforce, and our exempt store associates are competitively compensated.

We continue to analyze the rule changes as we put our action plans together throughout these changes. As always, we review cost pressures as a variable in our business that we are responsible to manage. Although still early in the analysis of the revised overtime regulations.

As of now, our best current estimate is a potential impact of $0.03 to $0.04 per share in the fourth quarter based on the December 1, 2016 implementation date. .

We will update this information as applicable, as we continue to review and finalize our plans and the associated financial impact. Our guidance also assumes a tax rate of 37.2% for the second quarter and 35.3% for fiscal 2016. Weighted average diluted share counts are assumed to be 236.4 million shares for Q2 and for the full year. .

For the second quarter, we are forecasting total sales to range from $5.03 billion to $5.12 billion and diluted earnings per share on a GAAP basis in the range of $0.66 to $0.72. These estimates are based on a low single-digit same-store sales increase and year-over-year square footage growth of 2.4%. .

For fiscal 2016, we are now forecasting total sales to range between $20.79 billion and $21.08 billion compared to the company's previously expected range of $20.76 billion to $21.11 billion. The company now anticipates net income per diluted share on a GAAP basis for full year of 2016 will range from $3.58 to $3.80.

This compares to our previous EPS guidance range of $3.35 to $3.65..

These estimates are based on a low single-digit same-store sales increase and 4% square footage growth. .

And I'll now turn the call back over to Bob. .

Thanks, Kevin. In closing, I'm very pleased with our first quarter results, and I'm extremely proud of our combined Family Dollar and Dollar Tree teams. They have accomplished extraordinary feats in a very short time. .

Less than a full year since closing, we've cleaned up the Family Dollar inventory and stores. The business has stabilized and is showing signs of long-term fundamental improvements, as evidenced by Family Dollar's 5.1% operating margin in the first quarter.

We are finalizing the logistics initiatives to begin shipping product from our first co-banner DC in St. George, Utah, and we continue to make progress on our systems integration and development of our shared services model for support functions. .

We have great confidence in our ability to deliver at least $300 million in annual run rate synergies. By the end of year 3, I believe we can exceed these expectations. These synergies will be achieved through a combination of lowering costs in both direct and indirect sourcing, banner optimization, logistics and overhead.

But this is just the beginning. There's much more to do. And I'll tell you that, as always, we will employ a disciplined approach to driving key strategic initiatives to the combined organization through improved communications, analysis, collaboration and incentives.

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

The Dollar Tree business model continues to grow and improve. It's powerful, flexible and more relevant than ever, providing extreme value to customers, while recording record levels of sales and earnings. Our model has been tested by time and validated by history.

For 33 consecutive quarters, the Dollar Tree banner has delivered positive same-store sales increases. Through good times and difficult times and 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 grow and lead the discount sector.

Our history of performance continues. .

In the first quarter, Dollar Tree banner sales increased 9.6%, same-store sales increased 2.2% and operating margin improved 60 basis points to 11.8%..

With the addition of Family Dollar, we are a larger, stronger and more diversified business, better able to grow in more markets, while serving more customers with exactly what they're looking for, great value in every store, every day. Our future has never been brighter. .

Operator, we are now ready for questions. .

[Operator Instructions] Our first question comes from Matthew Boss with JPMorgan. .

Congrats on a great quarter guys. So first question, flattish gross margins at Dollar Tree. You have easier compares in the back half.

What's the best way to think about gross margin opportunity as the year progresses? And with that, just on the sourcing outlook for IMU, anything longer-term structurally preventing Dollar Tree gross margins from returning to 2012, which I think was about 100 basis points higher?.

Matt, the sourcing opportunities are terrific. They're very favorable right now. There's nothing structurally that stands in our way of increasing our merchandise margins. As you know, in times of favorable buying opportunities, our retail is always $1. So we manage our cost in the market by -- and the value by looking at the cost.

So many times, as we get a lower cost, we turn it into better value product to drive more sales, more top line growth. We'll continue to do that. And so I would tell you that our merchandise margin is likely to stay in a consistent range over the past several -- many years, we've performed within a very predictable range.

This is -- does seem to be a favorable time for costs, merchandise costs as well as freight rates. So that -- I would factor that into the equation as we look forward. There's nothing standing in our way, frankly, from continuing to improve our margins.

I won't tell you what because we do have to sort of follow the customer, and we've got to provide for the customer the great values. And when times are tough, they want more of the things that they need every day. That's their first dollar that they spend. And then if they spend a second dollar, it's on things that are more discretionary.

So as we are still in one of those times, where the low-income customers especially are under pressure, we intend to continue to provide great consumer products at Dollar Tree as well as at Family Dollar, and great values for our customers in those projects.

And I'll close my long answer to your question, I apologize, but remember that, at Dollar Tree, the margin is as much about the mix of our product than the direct cost of the individual items. So when times are tough, we'll sell more consumer goods. When times improve, we'll sell a little more discretionary goods.

Right now, in the first quarter, the mix is as I would have expected it, mainly because of the impact of Easter. Both banners sold a little more discretionary product. .

Great. And then just a follow-up on the Family Dollar side.

As we think about the top line productivity opportunity at Family Dollar, can you talk to the key to what you've done so far to turn comps from negative to positive low-singles, and just what the drivers would be for the next inflection across the store as we think forward?.

This is Gary. Let me sort of describe the basics that we're doing because you go back to really the focus that we have in stores and it's delivering on many of the basics. And when we talk about table stakes, we're talking about some of the facility investments and investments in customer service.

So I would tell you the basics that we're also talking about is being ready on first of month when many of our customers have more money in their pocket. It also translates for us into being weekend-ready when our time-crunched customers are coming into the stores. So a lot of the focus, for us, is let's be in-stock.

And that comes from the standpoint of making sure the right products are in the right stores at the right time, but more than that, I would say the initiative around having our folks ready to stock the product when our customers are coming to the store.

So as we continue to push on the basics, on the backside of course we're taking a look at adjacencies and productivity by department. Those are the things we're working on in a tough environment in many stores to understand how do we continue over the long term to drive productivity into our Family Dollar store.

But I would just tell you, we have a lot of upside on delivering on the basics for our customers. They really count on us around the key elements of the month and really delivering on the basics. And if we get that right, that's where we see driving more sales productivity and driving our comp store sales. .

We'll go next to John Zolidis with Buckingham Research. .

Fantastic results. Wondering if I could ask kind of some follow-up questions around the Family Dollar integration. Can you talk about the factors that are driving the improvement in the reported gross margin at Family Dollar? And then, also, when we get out and look at the stores, some of them look really fantastic.

Other ones need a little bit more TLC.

Can you talk about how you're approaching the large store base in terms of which ones you're addressing first and how you're handling personnel within the Family Dollar field team from district managers down to store managers?.

John, Gary again. Let me just maybe paint the picture on margin at a high level. We're getting some of the beginnings of the work that we've done on synergy, lots of support from our vendor community. And I would tell you that both merchandising teams got off to a great start on that effort. And a piece of that is trying to show up.

Because a lot of those costs have to roll through the inventory flow. So we're trying to get that. But as much as anything, I would say it's a mindful approach to what we're doing with our smart ways to save, what's on sale, what's on price drop, our commitment to EDLP.

Those are the basics that allow us to give our customers great values every day, puts a few arrows in our quiver to reach out to them the right way. We've had benefit of a shrink this year, as you might expect, with our efforts to clean up the stores and get down -- get inventory. That's always a plus for every retailer, no exception to us.

We've seen that show up. And I would say our discretionary business has been a very bright spot for us, outpacing our consumables this quarter and really translates into really what our teams have brought to bear into our stores really across apparel and general merchandise and our seasonal.

We're off to great starts in February and March going to the Easter holiday. So those are some of the things driving the margin and the execution of what we do in-store. I think you've touched on the store base, exactly the big opportunity we saw and what really made us think this is a big idea.

And I would tell you, I'm not satisfied across all 8,000 stores. But the opportunity for us, there's no surprises here, how do we focus on it? I would tell you this. We have lots of great stores that sometimes the facilities are old that we can still start to clean them up, keep them well-merchandised.

And I just attended a handful of our sales meetings this April with our DM group. And that's really the focus for us to really get everybody on board with the initiatives that we're driving around table stakes.

And while we want all boats to rise, and certainly they will, we're really focused on the key stores that are going to drive volume and bottom line contribution.

And so across every operating region, down to the district, we've called out those targets to really figure out how do we raise those stores' performance, both being in-stock, the needs we have on a facility basis and the investment that we want to make in-store because it does need to show up to get product under the shelves, customer service.

And so we're very focused on that core group of stores here because we can hitch our wagon to that and drive lots of sales and bottom line cash flow. And we continue to preach the initiatives to all 8,000 stores. We'll get there, but this is going to be a journey for us to fix the fleet that we have. .

[Operator Instructions] Our next question comes from Michael Lasser with UBS. .

Bob, you've consistently said that you think the $300 million in synergies is conservative, and you expect upsides to that over time.

If you are going to outperform that expectation, when do you think that will start to show through? Is it not going to be until the third year that you might realize the upside?.

We're finding opportunities along the way. As Gary said, it's sort of a journey. And we started this journey with a $300 million target that we've -- through a lot of work and analysis and getting under the covers, we found the $300 million. Internally, we have a higher calling, though.

And as we are getting into operating the business day-by-day, we're always looking at improving it. We're finding additional ways to improve. A lot of them are -- to your timing question, a lot of them are going to be dependent on IS and IT. That is one of the gating factors.

We are beginning to get traction on that, but that is going to take some time because some of those things you do have to do in order. In other words, you have to do one before you can get to the other before they can then leverage that to get to the other.

So with our IT overall, we have great confidence that we're going to find more pots of gold along the way. Again, we have internal targets that are higher than the $300 million. We're not sharing that because right now, they're aspirational. But I believe that they're there.

And the confidence that I would like to share with you is that the $300 million that we have described so maybe eloquently, maybe not, over the past almost 18 months are there. We're confident the $300 million is there. We're confident that we will be able to find more than the $300 million.

And as time goes on, we'll be happy to share as we go forward with that. .

And let me ask one quick follow-up. You're getting close to the point at which you launched a distribution center that can serve both Dollar Trees and Family Dollars.

Does that make it feasible to be able to take some of the highest and most productive SKUs from Family Dollar that are on the $1 price point and put those into a Dollar Tree?.

Well, it's possible, but not -- we won't do that. We have no plans to turn our Family Dollars into -- or our Dollar Trees into multi-price point retail, just as we have no intent to turn Family Dollar into a Dollar Tree single-price point retail.

The power in this is in both brands, in operating, in running both brands at a very high level to serve more customers in more ways. And we are keeping all of the things that are customer-facing in each brand separate. We have a separate merchandise team for Dollar Tree than from Family Dollar.

There are separate strategies and category initiatives and all that goes with the different customer-facing things. And we're leveraging all the back-office, things that we can leverage with technology and with just support over both banners. So that's how we're thinking about it.

The initiative to co-banner the DC and develop the ability to ship all banners from a DC, the first benefit that we'll see from that is our ability to use any excess capacity that we have across the nation for either banner. For example, we now have 21 distribution centers, going on 22 distribution centers.

And some are Family Dollar and some are Dollar Tree. Some of our distribution centers are at capacity in one banner or the other, and the other banner under capacity. So if we could ship all banners out of all DCs, then we could more effectively use our capacity without building more capacity because we'd have it in the right place.

And also, we can improve our stem miles by being able to do that. That's just one of the opportunities that we have in logistics as we go forward. We'll continue to rationalize the opportunity and look at more ways to become more productive across banners by using and leveraging the same technology. .

We'll go next to Scot Ciccarelli with RBC Capital Markets. .

I guess, this question's probably for Kevin. How should we think about the flow of net synergies during the course of the year? Because if I'm not mistaken, right now, you guys are spending against those synergies. So what we can kind of see in the P&L is still somewhat modest because, again, you're spending against the cost savings.

But Gary's already referenced it and, obviously, Michael was asking about kind of the longer term.

But just in terms of 2016, how should we think about the flow of those net synergies?.

That's a good question, Scot, and we discussed that a little bit with the first quarter call and the fact that we do see it gaining steam as we go through the year basically. So to Gary's point, some of the merchandise cost synergies will flow in over time as we sell through inventory that we already had on hand.

And at the same point in time, we'll continue to work on all the other things that we're working on besides merchandise. And again, some of those -- the indirect procurement-type items will continue to flow and will gain some steam as we get -- especially as we get into Q3 and Q4, I think, is when you start to see a pickup.

So that's really the way our guidance has planned it as well. And as we initially said, the costs to achieve the synergies tend to be more front-end-loaded as we go through the process. And so that's not a surprise, and it's really how it's kind of flowing as we sit here today. So that's how we're thinking about it. .

That's very helpful. And just a clarification, have the Family Dollar stores started receiving Dollar Tree-ordered merchandise yet? Just thinking of the time line when you took ownership versus your typical 9-month ordering lead. .

Well, Family Dollar, we're not ordering merchandise for Family Dollar at Dollar Tree, we are leveraging the exact products and the vendor resources to get the lowest price.

So yes, any orders that are placed where we have the same item, and one company had a lower price, now we all have the same price, the lowest price, any orders that are placed against those items, we're seeing the benefit of it now. But that really is going to run through the year as we head off into the future.

But we're not buying a Dollar Tree product to put into Family Dollars, nor is Family Dollar buying product to put into Dollar Trees. .

We'll go next to Stephen Grambling with Goldman Sachs. .

So you slowed the Family Dollar rebanner process a bit as the Deals banners were converted, but maybe if you can just comment on what you're seeing from those FDO rebanners relative to your initial expectations in the base Dollar Tree business.

And then as a follow-up, should these rebannered locations see sales and profit ramp-up similar to a new Dollar Tree location?.

I'll answer that part of the question first. Yes, we expect these stores to become good Dollar Tree stores. Some of them are becoming excellent Dollar Tree stores. Some of them are becoming okay Dollar Tree stores, just as it is with a new store fleet. But our early indications, and look, we haven't had anything older than, what, 7 months.

But early indications on the rebanner is that it's, first of all, our margins go up substantially when we rebanner to a Dollar Tree. The sales are -- it's, on average, we like the total sales. We have some stores that are outperforming what we expected and some that are underperforming. So if you look at the average, we're where we need to be.

So one of the things we're continuing to do is look at the performance and marry that back up to the analysis and look at, what makes a great Family Dollar to Dollar Tree? What's the best? And where do those fall? And how can we improve this process? So we're going to do approximately 100 more this year.

The -- again, we took a short break on the rebannering early on to get the Deals stores rebannered. And now we've completed that project, so we're back onto the Family Dollar. But we're also looking at the performance and what we can do. As always, at Dollar Tree, we're looking for ways to improve the performance of our rebanners. .

And so one follow-up on that.

Can you just comment on maybe what the average profitability was of the Family Dollar locations that were first rebannered and maybe how that might compare to the ones that you'd be identifying going forward?.

I think the only metric we've really given around this is in the sense of what -- you can do the math and do what an average Dollar Tree store, which is roughly $150,000, as I remember it. So I think that's really the only metric. We didn't give any of the former FD information. And so that just is the metric we've given at this point. .

Thanks. And high level, though, Stephen, we're looking at maintaining the sales and improve in the margin when we rebanner from a Family Dollar to a Dollar Tree. So that's sort of the way we're looking at it.

And single-price point versus a multi-price point, if we can do the same sales or a little better -- a little better is better, and improve the margin lots of basis points, then we've got a real opportunity here. .

We'll go next to Denise Chai with Bank of America. .

Could you talk -- so you mentioned from a comp perspective February and March were better than April.

Did you see anything in April besides the Easter shift from a consumer perspective?.

I think you can characterize the first quarter as the shift of Easter and a cold, rainy, damp spring. And that's pretty much -- Easter shifted 2 weeks earlier. So you've got more sales in February and March because of the early Easter. And then one week in March, you lost the impact of Easter that you were up against from last year.

And then the first week, you lost the other. And then you had a couple of weeks after that, that were just really lousy weather, frankly, for those new spring goods that we had now changed our stores over to. So that's sort of the cadence. That's what I saw in April.

It was really just the cold spring weather, and we lost a lot of the Easter sales into March. .

Got it.

And just can you clarify a little bit about the cadence of square footage growth, how you get from 2.4% in the second quarter, say, to 4% for the full year?.

Yes. I mean, I think what we'll do is we'll be cycling the divestiture that we had to do in the fall, basically. So that's basically how it hops back up, Denise. .

And our final question comes from Dan Wewer with Raymond James. .

Bob, I wanted to follow up on Scot's question about the potential merchandise changes at Family Dollar after the deal was announced, that you had talked about inventory at Family Dollar not being appropriate for their customer, that you'd be reevaluating SKU-by-SKU and beginning to make changes.

Where are we on that process? I would assume that you begin to see significant change in the second half of this year, but I want to get an update from you. .

Yes, okay. Well, I think I understand the -- I'm going to turn it over to Gary, but the question from was -- I may have misunderstood it originally.

But it was the idea of providing a merchandise assortment that was relevant to the Family Dollar customer and providing more value to the Family Dollar customer by offering them product that maybe fit their price points better.

So a focus on opening price point, a focus on some name brand equivalent to private labels, a focus on no-name, just value brands in the stores as well as being competitive, I guess, on the name brand.

Gary, would you add more to that?.

Yes. I'd sort of go back to the things we're working on, Dan, and it comes around to really a 4-foot by 4-foot walk. So where are we on opening price point across every category? What's the role of private brands, the value brands on every place.[ph] Some of it, quite frankly, is a placement of the merchandising energy that we have in-store.

So because we had end caps tied up often with older inventory, we've been able to get that downstroke going, of what does our customer see in terms of fresh goods every month? Over the long run, it's really a question around the right SKUs or that is rationalization or that is the adjacencies of the departments, the flow of the stores.

Those are the bigger levers that we're going to pull over the long term. But I give to credit to the energy and confidence our merchandising team has, in quick order, gotten the right items in front of our customers. Our customers shop differently first of the month to the end of the month.

And we are going to know this customer better than anybody else in terms of how they shop us and their needs during the course of the month. So that's really our effort right now. The basics of product, price, placement are all the levers that we're working on right now to make sure we're serving our customer well. .

Well, if I were to ask the question this way, if your goal was to increase Family Dollar sales per square foot, let's say, to $210, do you have the appropriate inventory content today? And what's missing is better in-store standards and execution? Or do you think that the merchandise content has to change from here to get to that kind of sales productivity?.

Let me answer it this way. I think, at this point, we can get traction by doing some of the basics I've described, and we can get the Family Dollar fleet driving a higher sales productivity. We see it as doable. It's waiting for us to continue to polish it up and get it going.

I think over the long run, I think there is more work to be done on driving a higher sales productivity within the 4 walls. Those are some of the things we're testing now, understanding our customer better, to really for the long term understand what this box should look like. .

That concludes today's question-and-answer session. At this time, I'd like to turn the conference back to Randy Guiler for closing remarks. .

Thank you, Lauren, 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 tentatively scheduled for Thursday, August 25, 2016. Thank you, and have a good day. .

This concludes today's conference. Thank you for your participation. You may now disconnect..