Q4 2016 Real-Time Call Brief

Highlights

Enterprise total sales for the fourth quarter increased 5% to $5.64 billion, and same-store sales, which now includes our Family Dollar segment, on a constant currency basis increased 1.2%.

Adjusted for the impact of Canadian currency fluctuations, the same-store sales increase was 1.3%.

By segment, same-store sales for the Dollar Tree banner increased to 2.3%, or 2.4% when adjusted for Canadian currency fluctuations.

For the Family Dollar banner, same-store sales increased 0.2%.

Our gross margin rate improved 130 basis points to 32.1%.

We leveraged our total SG&A expense by 30 basis points.

Operating income increased 24.9% to $586.5 million and our year-over-year operating margin for the quarter improved from 8.8% to 10.4%.

Net income for the quarter increased 40.5% to $321.8 million and our earnings per share were $1.36.

This represents a 40.2% improvement from the fourth quarter a year ago and exceeded the high end of our guidance range by $0.03 per share.

Operating margin improved a 160 basis points to 10.4% for the quarter and importantly our EPS exceeded the top end of our range of guidance.

We are pleased with our progress on the integration of our Family Dollar business and we remain on track to deliver at least $300 million and run rate synergies by the end of the third year post acquisition.

In fiscal 2016, we opened 584 new stores and in fiscal 2017 our plans include opening 650 new stores.

Our goal is to be recognized by customers as the leading retailer in Canada, at the single-price-point of $1.25 Canadian, just as we're in the U.S. at the $1 price point.

We now operate 226 stores in Canada, and believe, we've an opportunity for 1,000 stores overtime.

For the quarter, our Enterprise same store sales increased by 1.2%.

Highlights for the Dollar Tree banner include; total sales in Q4 increased 7.9% to $2.9 billion.

Same store sales on a constant currency basis increased 2.3%.

Gross profit margin improved to 110 basis points over Q4 last year.

Fourth quarter operating margin was 16.4%, an improvement of a 140 basis points over the last year's 15%.

Dollar Tree's operating margin for the full year in 2016 grew a 130 basis points to 12.9%.

Geographically, Dollar Tree same-store sales growth for the quarter was very balanced as each of our operating zone delivered positive comps had exceeded 1%.

Highlights for the Family Dollar banner in the fourth quarter included; a total sales increase of 2.2%, same-store sales increase of 20 bps.

Average ticket was up 30 bps and traffic was down slightly.

Gross profit margin improved to 110 basis points over last year and operating margin was 4%, an improvement of 160 basis points over the prior year quarter.

Real estate; we opened total of 104 new stores, 47 Dollar Tree's and 57 Family Dollar's.

We relocated or expanded 27 stores, 6 being Dollar Tree's, 21 Family Dollar's and we rebannered 8 additional Family Dollar's to Dollar Tree for a total of 139 projects during the quarter.

We also added freezers and coolers in the 86 Dollar Tree stores during the fourth quarter, bringing our total of Dollar Tree stores of freezers and coolers to 4,788 stores.

During the quarter, we closed 55 stores, 15 Dollar Trees and 40 Family Dollars.

We ended the fiscal year with over 14,000 stores, 14,334; 6,360 Dollar Trees; and 7,974 Family Dollar stores.

For fiscal '16, we opened 359 New Dollar Tree stores; 225 Family Dollar stores for the total 584, which exceeded our target of 550 new stores during the year.

For 2017, our real estate trends include 650 new stores; 350 Dollar Tree, and 300 Family Dollar stores.

Renovations at 250 Family Dollar stores.

Cooler and Freezer expansions in 300 Family Dollar stores and adding freezers and coolers to 400 new in existing Dollar Tree stores.

Total sales for the fourth quarter grew 5% to $5.64 billion.

This was at the midpoint of the guidance range of $5.59 billion to $5.69 billion.

Dollar Tree segment total sales increased 7.9% to $2.9 billion and Family Dollar segment total sales increased 2.2% to $2.74 billion.

Enterprise same-store sales on a constant currency basis increased to 1.2%.

Adjusted for the impact of the Canadian currency fluctuations, same-store sales grew 1.3%.

By segment basis, same-stores sales increases were 2.3%, for the Dollar Tree banner, and 0.2% for Family Dollar banner.

We estimate the incremental cannibalization impact of the Dollar Tree banner comp to be approximately 50 basis points for the quarter.

Gross profit for the combined organization increased 9.3%, to $1.81 billion for the fourth quarter of 2016, compared to the prior year's quarter.

As a percent of sales, gross profit margin improved 130 basis points to 32.1% versus 30.8% in the prior year's quarter.

Gross profit margin for the Dollar Tree segment was 37.5% during the fourth quarter, a 110 basis points improvement compared with the prior year's fourth quarter.

Gross profit for the Family Dollar segment increased 6.6% to $718.5 million.

Gross profit margin for the segment was 26.3% during the fourth quarter compared with 25.2% in comparable prior year period.

Excluding inventory step up amortization of $15.9 million in the prior year's quarter, gross profit margin was 25.8% for Q4 of 2015.

Consolidated selling, general and administrative expenses in the quarter improved to 21.7% from 22% in the same quarter last year as a percent of net sales.

Q4 SG&A expense for the Dollar Tree segment as a percent of sales improved 30 basis points to 21.1% from 21.4% in the prior year's quarter.

SG&A expenses for the Family Dollar segment was $608.1 million and as a percent of sales was 22.2% compared to 22.7% in the prior year's quarter.

Operating income for the Enterprise increased $586.5 million compared with $469.7 million in the same period last year.

Operating margin increased to 10.4% for the quarter from 8.8% in last year's fourth quarter.

Operating income margin for the Dollar Tree segment grew 140 basis points to 16.4%, when compared to the prior year.

Operating income for Family Dollar segment increased $45.1 million to $110.4 million, a 160 basis points improvement as a percent of sales when compared to the prior year's quarter.

Non-operating expenses for the quarter totaled $88.8 million, which was comprised primarily of net interest expense and $11.7 million of acceleration of amortizable non-cash deferred financing costs, related to our debt prepayment made in January.

Our effective tax rate for the fourth quarter was 35.3% compared to 35% in the prior year's quarter.

For the fourth quarter, the Company had net income of $321.8 million or $1.36 per diluted share compared to reported net income of $229 million or $0.97 per diluted share in the prior year's quarter.

The current year includes $0.03 of expense for the write-off of amortizable non-cash deferred financing cost incurred during the quarter as previously noted.

Our combined cash and cash equivalents at year end totaled $866.4 million compared to $736.1 million at the end of 2015.

Our outstanding debt is approximately $6.3 billion, a decrease of $1 billion from the prior year end.

Inventory for the Dollar Tree segment at quarter end was 4.6% greater than at the same time last year, while selling square footage increased 6.6%.

Inventory for selling square foot decreased 2%.

Inventories for the Family Dollar segment at quarter end decreased to 4.6% from the same period last year, and decreased 6% on selling square foot basis.

Capital expenditures were $113.2 million in the fourth quarter of 2016, versus $144 million in the fourth quarter of last year.

For fiscal 2017, we're planning for consolidated capital expenditures to range from $760 million to $780 million.

Our plans include renovating 250 Family Dollar stores in 2017.

The addition of frozen and refrigerated capability to a total of 400 new and existing Dollar Tree stores, the expansion of frozen and refrigerated for 300 Family Dollar stores.

Depreciation and amortization totaled $155.5 million for the fourth quarter.

This includes purchase accounting related cost of $17.9 million for favorable lease right amortization.

Depreciation and amortization expense was $174.9 million in the fourth quarter last year.

For fiscal 2017, we expect consolidated depreciation, amortization to range from $610 million to $613 million.

This includes $66 million for fiscal 2017 for the amortization of favorable lease rights for the purchase accounting valuation of Family Dollar leases.

In Q1 2016, we had a one-time $0.09 per share benefit in our tax rate related to state tax planning.

In Q3 2016, we had a one-time $0.09 per share benefit in our tax rate related to a reduction in state tax rate, which decreased the deferred tax liability related to our trade and intangible assets.

Also in Q3, 2016, we incurred $0.09 per share in expenses related to our debt refinancing.

In Q4 of 2016, we incurred $0.03 per share expenses related to our debt repayments.

Fiscal 2017 includes a 53rd week.

The extra week in the fourth quarter is expected to add $400 million to $430 million to sales and $0.19 to $0.22 to earnings per diluted share.

Net interest expense will be approximately $75 million for quarter in Q1 to Q3 and approximately $81 million in Q4 due to the extra week.

Our guidance assumes the tax rate of 37.2% for the first quarter and 37% for fiscal 2017.

Weighted average diluted share counts are assumed to be 237.5 million shares for Q1 and 237.7 million for the full year.

For the first quarter we are forecasting total sales to range from $5.26 billion to $5.35 billion and diluted earnings share in the range of $0.91 to $0.98.

This compares to a reported $0.98 per diluted share from the prior year's first quarter or $0.89 per diluted share when adjusted for the onetime tax rate benefit of $0.09 per share related to the state tax planning.

These estimates are based on a flat to low single digit same stores sales increase in year-over-year growth square footage growth of 3.9%.

For fiscal 2017, we are forecasting total sales to range between $21.94 billion and $22.33 billion and diluted earnings per share in the range of $4.20 to $4.56.

These estimates are based on a flat to low single digit same store sales increase and 3.9% square footage growth includes the benefit of the 53rd week occurring in Q4 fiscal 2017 as previously noted.

Dollar Tree is now a diversified combination of a 6,000-store chain and an 8,000-store chain, each with its unique ability to effectively serve more customers through all types of markets.

For full year 2016, our Dollar Tree operating margin improved 130 basis points to 12.9%.

In the fourth quarter, total sales increased 5%, enterprise-wide same-store sales increased 1.2% and operating margin improved from 8.8% a year ago to 10.4%.