Dollar Tree's (DLTR) CEO Bob Sasser on Q1 2016 Results - Earnings Call Transcript

| About: Dollar Tree, (DLTR)

Dollar Tree, Inc. (NASDAQ:DLTR)

Q1 2016 Earnings Conference Call

May 26, 2016, 09:00 ET

Executives

Randy Guiler - VP, IR

Bob Sasser - CEO

Kevin Wampler - CFO

Gary Philbin - President & COO

Analysts

Matthew Boss - JPMorgan

John Zolidis - Buckingham Research

Michael Lasser - UBS

Scot Ciccarelli - RBC Capital Markets

Stephen Grambling - Goldman Sachs

Denise Chai - Bank of America Merrill Lynch

Dan Wewer - Raymond James

Operator

Welcome to Dollar Tree, Incorporated'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.

Randy Guiler


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. Please limit your questions to one and one follow-up if necessary.

Now I will turn the call over to Bob Sasser, Dollar Tree's Chief Executive Officer.

Bob Sasser

Thanks, Randy. Good morning, everyone. This morning we announced Dollar Tree's results for the first quarter of FY '16. 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 mid-point 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're employing a disciplined approach to building the foundation for long term improvements in 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 continued 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's 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 comps of 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 are 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 to 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 jelly beans, 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 everyday 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 re-bannered 126 Deals stores to Dollar Tree stores and we re-bannered 3 Family Dollar's 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. Additionally, I'm pleased to report that, since quarter end, we have successfully completed the re-bannering of all of our Deals stores.

As a reminder, 210 Deals stores were converted to Dollar Tree stores, 9 were converted to Family Dollar stores and 3 we're closing, as their lease term expired. Going forward, all of our resources and efforts will be dedicated to our two primary growth banners, Dollar Tree and Family Dollar. In addition to new stores, we continued to execute our strategy to improve the productivity of our existing stores. Our Drive the Business initiatives include, number one, 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 number 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're 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're 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 one 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 re-bannered three Family Dollar stores to Dollar Tree and six others were in the process of conversion at quarter end. Additionally, nine Deal$ store locations were converted to Family Dollar's. 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 everyday 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're committed to improving their shopping experience. There's a keen focus on table states, including store standards and conditions where we aspire to offer a shopping experience that is bright, clean and free of clutter. There's a keen focus on the customer experience with a store that is full and in stock, easy to shop, full of product that is a trusted value.

There is a focus on merchandise relevance. In the words of the customer, my Family Dollar has what I need. There's a focus on customer engagement from friendly and informed associates. Importantly, not all of the table states initiatives require investment and expense or capital. By identifying and establishing winning retailer disciplines and benchmarks, customers are already seeing cleaner aisles with less clutter. Our customer satisfaction surveys continue to reflect improvements in customer scores in each of our four primary survey categories, 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 customers' shopping trips.

We will manage investments in table states 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 cost, 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. Some comments on achieving synergies and delivering great values. We continue to have great confidence in our ability to deliver at least $300 million in annual run-rate synergies by the end of the third full-year post closing. And, as previously disclosed, these synergies will be achieved with one-time costs of $300 million. As a reminder, we've identified synergies in four primary areas, one, sourcing and procurement; two, our re-banner program for optimizing store formats; three, distribution and logistics; and four, overhead and corporate SG&A. At this stage, we're clearly on track to achieve our first 12 months milestone of at least $75 million in run-rate synergies.

Now I will 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.

Kevin Wampler

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 mid-point 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 $2.7 billion. Year-over-year sales comparisons for Family Dollar were impacted by re-bannered 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 re-bannered 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 for 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 costs, higher strength as a result of unfavorable physical inventory results, higher distribution and occupancy costs as a percentage of net sales and cycling the one-time $2 million non-cash charge from the prior year related to a change in the inventory accounting method for our Canadian operations.

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 cost 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 costs. Excluding the prior year's costs, 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 cost.

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 cost 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 re-bannered 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 in the prior year's comparable period. Non-operating 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 one-time 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 number 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 one-time tax benefit and the prior-year quarter acquisition-related costs, diluted EPS improved by 25.4% to $0.89 from $0.71. The 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 increase 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're pleased with the progress we're seeing on in-stock levels on key items.

We're 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 FY '16, we're planning for consolidated capital expenditures to range from $650 million to $670 million. Capital expenditures will be focused on new stores and remodels, including fee development stores, our re-banner 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 in depreciation for useful life and asset revaluation.

Depreciation expense was $52.8 million in the first quarter of last year. For FY '16, 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 two items which are included in our guidance. First, it includes $5 million for Q2 and $13 million for FY '16 of depreciation above the historical run rate for Family Dollar as a result of harmonizing the depreciable lives accounting policies of the two 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 FY '16 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 re-bannered. 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 re-banner efforts. This cannibalization expectation was planned and factored into our re-banner 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 FY '16 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. We've put our action plans together to address these changes. As always, we review cost pressures as a variable in our Business that we're 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 FY '16. 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're 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 FY '16, we're 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 the 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.

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

Bob Sasser

Thank you, 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. In 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're finalizing the logistics initiatives to begin shipping product from our first co-bannered 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 three.

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

Operator, we're now ready for questions.

Question-and-Answer Session

Operator

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

Matthew Boss

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?

Bob Sasser

Matt, the sourcing opportunities are terrific. They are 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 costs in the market and the value by looking at the cost. Many times, as we get lower cost we turn it into better value product to drive more sales, more top-line growth. We will continue to do that. I would tell you that our merchandise margin is likely to stay in a consistent range. Over the past many years we've performed within a very predictable range. This does seem to be a favorable time for merchandise cost as well as freight rates.

So, I would factor that into the equation as we look forward. There is nothing standing in our way, frankly, from continuing to improve our margins. I won't tell you because we do have to follow the customer and we've got to provide for the customer the great values. When times are tough they want more of the things that they need every day. That's their first $1 that they spend and then if they spend a second dollar it's on things that are more discretionary. As we're 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 and those projects.

I will 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 will 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've expected it, mainly because of the impact of Easter. Both banners sold a little more discretionary product.

Matthew Boss

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?

Gary Philbin

Let me describe the basics that we're doing, because you go back to, really, the focus that we have in stores and 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. I would tell you the basics that we're also talking about is being ready on the first of the month when many of our customers have more money in their pocket. It also translate for us into being weekend-ready when our time-crunch customers are coming into the stores. 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 in 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 test environment in many stores, to understand how do we continue over the long term to drive productivity into a Family Dollar store. But I would just tell you we have a lot of upside on delivery 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.

Operator

We will go next to John Zolidis with Buckingham Research.

John Zolidis

I was wondering if I could ask 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 are addressing first and how you are handling personnel within the Family Dollar field team, from district managers down to store managers? Thanks.

Gary Philbin

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. A piece of that is starting to show up because those costs have to roll through the inventory flow. So, we're starting 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. It puts a few arrows in our quiver to reach out to them the right way.

We've had benefit of shrink this year, as you might expect, with our efforts to clean up the stores and get out dead 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. It 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 into the Easter holiday. Those are some of the things driving the margin and the execution of what we do in store. I think you've touched on, on the store base, exactly the big opportunity we saw and what made us think this is a big idea. And I would tell you, I'm not satisfied across all 8000 stores but the opportunity for us, there are no surprises here, how do we focus on it.

I would tell you this, we have lots of great stores and sometimes the facilities are old, that we can still start to clean them up, keep them well merchandised. 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.

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 onto the shelves, customer service. 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 8000 stores. We will get there but it's going to be a journey for us to fix the fleet that we have.

Operator

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

Michael Lasser

Bob, you've consistently said that you think the $300 million in synergies is conservative and you expect upside 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?

Bob Sasser

We're finding opportunities along the way. As Gary said, it's a journey. We started this journey with a $300 million target that 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're 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're 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. 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 are aspirational, but I believe that they are 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 will be happy to share as we go forward with that.

Michael Lasser

And let me ask one quick follow-up. You're getting close to the point at which you'll launch 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 beyond the $1 price point and put those into a Dollar Tree?

Bob Sasser

It's possible but we won't do that. We have no plans to turn our Dollar Trees into multi-price point retail. Just as we have no intent to turn Family Dollar into Dollar Tree at single-price point retail. The power in this is in both brands and operating and running both brands at a very high level to serve more customers in more ways. We're 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 the technology and with 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 will 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 to 22 distribution centers. 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 can 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 will continue to rationalize the opportunity and look at more ways to become more productive across banners by using and leveraging the same technology.

Operator

We will go next to Scot Ciccarelli with RBC Capital Markets.

Scot Ciccarelli

This question is 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 see in the P&L is still somewhat modest because, again, you are spending against the cost savings. Gary has already referenced it and obviously Michael was asking about the longer term, but just in terms of 2016 how should we think about the flow of those net synergies? Thanks.

Kevin Wampler

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. To Gary's point, some of the merchandise cost synergies will flow in overtime as we sell through inventory that we already had on hand. And at the same point in time, we will continue to work on all the other things that we're working on besides merchandise.

And again, some of those indirect procurement type items will continue to flow and will gain some steam, especially as we get into Q3 and Q4, I think is when you start to see it pick up. That's really the way our guidance has planned it, as well. As we initially said, the costs to achieve the synergies tend to be more front-end loaded as we go through the process. That's not a surprise and it's really how it's flowing, as we sit here today. That's how we're thinking about it.

Scot Ciccarelli

And just as a clarification, have the Family Dollar stores started receiving Dollar Tree ordered merchandise yet? Just thinking of the timeline when you took ownership versus your typical nine-month ordering lead. Thanks.

Bob Sasser

Family Dollar, we're not ordering merchandise for Family Dollar at Dollar Tree. We're 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 at a lower price, now we all have the same price, the lowest price. Any orders that are placed to get those items, we're seeing the benefit of it now, but that really is going to run through the year and off into the future. But, no, we're not buying a Dollar Tree product to put into Family Dollar, nor is Family Dollar buying product to put into Dollar Tree.

Operator

We will go next to Stephen Grambling with Goldman Sachs. We do have time for couple more questions today.

Stephen Grambling

You slowed the Family Dollar rebanner process a bit as the Deal$ banners were converted. But maybe if you can just comment on what you're seeing from those FDO rebanners relative to your initial expectations from 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?

Bob Sasser

I will 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 with the new store fleet, but our early indications and look we haven't had anything older than seven months, but early indications on the rebanner is that, first of all, our margins go up substantially when we rebanner to a Dollar Tree. 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 prove this process. We're going to do approximately 100 more this year. 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 on the Family Dollar. But we're also looking at the performance and what we can do. As always, at Dollar Tree we're looking at ways to improve the performance of our rebanners.

Stephen Grambling

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? Thanks again.

Kevin Wampler

I think the only metric we've given around this is a sense of -- 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 so that just is the metric we've given at this point.

Bob Sasser

High level, though, we're looking at maintaining the sales and improving the margin when we rebanner from a Family Dollar to a Dollar Tree. That's the way we're looking at it, 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.

Operator

We will go next to Denise Chai with Bank of America.

Denise Chai

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?

Bob Sasser

I think you can characterize the first quarter as the shift of Easter and a cold rainy, damp spring. That's pretty much. Easter shifted to two weeks earlier so you got more sales in February and March because of the early Easter. And then one week in March you lost the impact of the Easter that we were up against from last year. And then the first week you lost the other. And then you had a couple weeks after that that were just really lousy weather, frankly, for this new spring goods that we had now changed our stores over to. So, that's 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.

Denise Chai

And could 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?

Kevin Wampler

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

Operator

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

Dan Wewer

Thanks. Bob, I wanted to follow up on Scott'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 would be reevaluating SKU by SKU and beginning to make changes. Where are we on the process? I would assume that you began to see significant change in the second half of this year but wanted to get an update from you.

Bob Sasser

Yes, okay, I think I understand. I'm going to turn it over to Gary, but the question 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 products 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 on the name brand. Gary, would you add more to that?

Gary Philbin

Yes, I would go back to the things we're working on, Dan. It comes around to really a four foot by four foot block. So, where are we on opening price point across every category? What's the role of private brands? The value brands ought to have a place. Some of it, quite frankly, is a placement of the merchandising energy that we have in stores 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. Part of that is rationalization, part of that is the adjacencies of the departments, the flow of the stores. Those are the bigger of levers that we're going to pull over the long term. I give 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're 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. That's really our effort right now. The basics of product, price, placement are all the levers we're working on right now to make sure we're serving our customer well.

Dan Wewer

If I were to ask the question this way -- if your goal was to increase Family Dollar's 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 that kind of sales productivity?

Gary Philbin

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, it's doable, it's waiting for us to continue to polish it up and get it going. I think over the long run there is more work to be done on driving a higher sales productivity within the four 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. I hope that helps.

Operator

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, please.

Randy Guiler

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.

Operator

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

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