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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the Dollar Tree Inc. First Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Randy Guiler, Vice President, Investor Relations. Please go ahead, sir.
Thank you, Jonathan. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the first fiscal quarter 2018. Participating on today's call will be our President and CEO, Gary Philbin; and our CFO, Kevin Wampler.
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, 10-Q, and Annual Report, 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'll turn the call over to Gary Philbin, Dollar Tree's President and Chief Executive Officer.
Thanks, Randy, and good morning everyone. Thanks for your patience. This morning, we announced our results for our first quarter of fiscal 2018. Sales increased 5% to $5.55 billion. Our consolidated same-store sales increased 1.4%. By segment, comp sales for the Dollar Tree banner increased 4%, and for the Family Dollar banner, comp sales decreased 1.1%. Our enterprise gross margin rate declined 20 basis points to 30.6%. Operating income increased 12.6% to $437.6 million. And excluding costs associated with our recent refinancing and the prior year's $50.9 million receivable impairment, adjusted earnings per share increased 21.4% to $1.19.
Our teams in both banners worked hard to deliver top line sales and bottom line results that were within our guidance range for the quarter when adjusted for the debt refinancing. We started the year knowing we needed to overcome an early Easter. Our teams faced some significant hurdles and freight cost pressure above our initial estimates in the quarter, and the disruption of business, especially at Family Dollar from a wetter and cooler-than-expected spring. Faced with these issues, I'm proud of our banners and teams' efforts to overcome these hurdles.
By our business segments, for Dollar Tree, we had a positive quarter of 4% comp, now the fourth consecutive quarter of comps greater than 3.5%. Family Dollar comps, while negative, had positive consumable comps, now the sixth consecutive quarter of positive comps for the consumables side of our business. Our Dollar Tree Canada team exceeded its plan for operating income driven by improved margins and expense leverage, and our Dollar Tree Direct online business delivered double-digit comp increases in both sales and side business.
In our Dollar Tree banner for the first quarter, our top performing categories were candy, snacks and beverage, beauty and eyewear, health and personal care, and household consumables. Our sales performance was very balanced with discretionary slightly outperforming consumables.
February same-store sales were in line with the comp for the quarter. March was a strong positive, and April was down year-over-year as expected; both March and April comps were affected by the earlier Easter, April 1st this year, compared to April 16th last year. Geographically, Dollar Tree same-store sales growth was strongest in the Southwest and Southeast, and all of our zones delivered positive comps at or greater than 3%. We're really pleased with the Dollar Tree banner's comp store sales results in a quarter that had the disruption of winter storms, an early Easter, and in a spring's weather's arrival that seemed later than most years. Our 4% comp was a remarkable result from all of our store teams and our merchants.
Our merchant teams again hit the mark on incredible values and assortment. We asked them to make up for an early Easter, and we moved the needle across both our discretionary and consumable categories. Over the past year, the Dollar Tree merchant team has developed and tested an initiative for select stores, which we call Snack Zone. The Snack Zone is designed to provide customers with a compelling assortment of immediate consumption products at the dollar price point to drive incremental sales. Our customers are excited with the introduction of the Snack Zone, great values across categories of cold beverages, candy, snack cake, salty treats, other favorites that bring our customers back to those treats that they crave. We're excited about these incremental sales and additional foot traffic that they generate in the stores we're installed. During Q1, we added the Snack Zone to 214 Dollar Tree stores, and have plans to launch this initiative into 750 Dollar Tree stores in fiscal 2018.
For the Family Dollar banner in the first quarter, though we did not achieve our intended target on comps for the quarter, we continue to make progress around our assortment, marketing, and store renovation program. Our pressure on comps was nearly all due to misses in apparel and lawn and garden, our two departments that got off to a slow start with the colder-than-normal-spring and early Easter. However, the following highlights continue to show strength in the underlying business. Top performing categories includes refrigerated and frozen food, school and office supply, snacks and beverage. Our comp performance was again driven by consumables. I'm pleased with our progress across these categories as it speaks to the relevance and items that our customers need most, and count on Family Dollar to deliver weekly.
Our sales cadence through the quarter, comp sales were strongest in March, and softest in April, as expected, with the impact of the Easter holiday timing shift. Geographically, Family Dollar same-store sales for the quarter was strongest in our Northeast and West zones. We also worked during the quarter to reset and highlight beauty care. It's an important category for our primary loyal customer and has been very well received. And we've seen strong comps in the stores completed. Our expanded assortment has turned this category positive dramatically in March and April despite the Easter shift and cooler temperatures.
Our increased inventory levels of family dollar represent our measured investment of additional inventory in key departments to drive better end stocks along with the timing of several resets that were in motion. We expect this to decline over the year from current levels. Our customer-facing program to refresh our value message at Family Dollar is Smart Ways to Save, whether you visit a Family Dollar store, view a marketing circular or check our Web site you will see a consistent value messaging. It's all across our Smart Ways to Save. EDLP pricing for everyday value, price drops that reflect meaningful value on promotional items, our $1 Wow items which drives surprise value in an opening price point across our stores, and Compare and Save calls on great values on our private brands. And our Smart Coupon program supports us with our messaging.
During the quarter, we had more than 900,000 new customers sign up for Smart Coupons, now bringing our total enrollment to over six million since the program was launched chain-wide in 2016. The Family Dollar mobile app makes it easier for customers to use Smart Coupons; 2.9 million customers now have downloaded the app, and we are receiving strong reviews on both Android and Apple operating systems. We continue to gain traction on the new private brands that we've been introducing across the chain. These brands have been developed to provide national brand comparable quality and meaningful savings to support the Compare and Save component of our Smart Ways to Save program. Our customers know they can count on the quality with our 100% customer satisfaction guarantee.
We've completed the rollout of new brands in the consumables category and are well underway with changes being made in our apparel and home categories, which should be completed by the end of Q2. These brands provide customers an alternative, but even greater values. Our goal is to drive traffic and loyalty while enhancing profit margins.
During the first quarter, we completed another 215 Family Dollar store renovations, bringing our total to 592. We continue to be very pleased with the initial results we are seeing in these newly renovated stores, and especially about the feedback we are receiving from our customers and store teams. The renovated stores provide our customers with a better Family Dollar shopping experience. Better shopping adjacencies and more productive meaningful end caps, expanded beverage and snacks, including immediate consumption [quarters] [ph] near checkout, added assortment of food in coolers and freezers, updated hair care assortment, expanded adult beverage in select stores, a shopper-friendly power alley to emphasize $1 Wow items, and a faster checkout process for the customer.
Our store teams are working hard to be the neighborhood store of choice for the fill-in shopping needs of our Family Dollar customers that typically live, work, and shop near our stores.
Highlight for the quarter at Dollar Tree Canada include the team delivered mid-to-single digit positive comps for the quarter. We saw increases in both ticket and traffic. April was the softest month of the quarter due to the earlier Easter. Both discretionary and consumables comp better than 4% for the quarter. Top performing categories included law and garden, floral, and kitchen textiles. And the operating income was slightly ahead of plan driven by the margins and overall SG&A leverage. Our focus on our people, retention and building on operational leadership capability continue to be our fundamental to driving solid results in Canada.
Dollar Tree Direct is our selling Web site for the Dollar Tree banner, which provides opportunities for enhancing our customer base, driving incremental sales, extending brand awareness, and then encouraging in-store visits. Q1 represent another productive and profitable quarter for Dollar Tree Direct with double-digit increases in both sales and Web site traffic, conversion rates increased for both desktop and mobile during the quarter. Our online videos earn more than 1.6 million views during the quarter highlighted by our new seasonal prize videos associated with Easter, and highlighting our expanded assortment of frozen foods.
In Q1, our e-mail subscriber database exceeded 3.4 million customers they have opted in. Our e-mail subscribers are brand loyal, and are excited to be the first to know of great value since selections we offer every week. Our Q1 marketing was heavily focused on spring, Easter, and early summer with the goal of driving both in-store traffic and online sales. Check out both Web site at dollartree.com and familydollar.com.
Looking at real estate for the first quarter, we opened a total of 130 new stores, 68 Dollar Trees, 62 Family Dollars, we relocate or expanded 26 stores, 24 Dollar Trees and two Family Dollars, and we renovated 215 Family Dollar stores as part of the renovation initiative for a total of 371 projects during the quarter. We also added freezers and coolers into our 104 Dollar Tree stores during the first quarter, bringing our total of Dollar Tree stores with freezers in course to 5,311 stores. During the quarter, we closed five stores, two Dollar Trees and three Family Dollars, and we ended the quarter with 14,957 stores; 6,716 of them being Dollar Trees, 8,241 Family Dollars.
I will now turn the call over to Kevin to provide more detail on our first quarter performance and our outlook for Q2 and fiscal 2018. Kevin?
Thanks, Gary, and good morning. Total sales for the first quarter grew 5% to $5.55 billion within our guidance range of $5.53 billion to $5.63 billion. Dollar Tree segment total sales increased 8.3% to $2.78 billion, and Family Dollar segment total sales increased 2% to $2.77 billion. Enterprise same-store sales increased 1.4%. On a segment basis, same-store sales for the Dollar Tree banner increased 4% or 4.1% when adjusted for Canadian currency fluctuations, and the Family Dollar banner decreased 1.1%.
Overall gross profit increased 4.5% to $1.7 billion for the first quarter of 2018, compared to the prior year's quarter. As a percent of sales, gross profit margin declined 20 basis points to 30.6% versus 30.8% in the prior year's quarter. Gross profit margin for the Dollar Tree segment was 34.5% for the first quarter, a 40 basis point decline compared with the prior year's first quarter. Factors impacting the segments gross margin performance during the quarter included shrink costs, which increased 30 basis points, merchandise cost, including freight increased 20 basis points due to higher freight costs partially offset by increased sales of higher margin variety items.
Distribution costs increased 15 basis points, primarily from higher distribution center payroll costs. And these are partially offset by occupancy costs, which decreased 20 basis points resulting from leverage from the comparable store sales increase in the quarter.
Gross profit margin for the Family Dollar segment was 26.7% during the first quarter, compared with 26.9% in the comparable prior year period. The 20 basis point decline was primarily due to occupancy costs, which increased 45 basis points due to loss of leverage from the decrease in comparable store sales, shrink costs, which increased 30 basis points, and distribution costs increased 10 basis points due to higher distribution center payroll costs. These were partially offset by markdowns, which decreased 40 basis points resulting from fewer promotional markdowns and merchandise cost, including freight decreased 30 basis points resulting from higher initial mark-on partially offset by increased freight costs.
Consolidated selling, general, and administrative expenses as a percentage of net sales in the quarter improved 70 basis points to 22.7% from 23.4% in the same quarter last year. Excluding the $5.9 million receivable impairment from the prior year's quarter, SG&A as a percentage of sales increased to 20 basis points from an adjusted 22.5% in the prior year's quarter. The increase was driven by higher store payroll cost partially offset by lower depreciation.
First quarter SG&A expense for the Dollar Tree segment as a percentage of sales was consistent with the prior year at 22.6%. Store hourly payroll cost increased 30 basis points related to our Tax Cut and Jobs Act savings reinvestment plan. This increase was offset by lower depreciation in utility cost.
SG&A expense for the Family Dollar segment as a percentage of sales was 22.8%, compared to 24.2% in the prior year's quarter. Excluding the $50.9 million receivable impairment from the prior year, Family Dollar SG&A as a percentage of sales increased to 50 basis points. The increase was a result of 65 basis points increase in store hourly payroll expense that was slightly offset by lower depreciation expense.
Operating income for the enterprise increased to $437.6 million, compared with $388.8 million in the same period last year. Operating income margin improved 50 basis points to 7.9% for the quarter from 7.4% in last year's first quarter. Excluding the previously-mentioned receivable impairment to prior year, quarter adjusted operating margin was 8.3%.
Operating income margin for the Dollar Tree segment declined 40 basis points to 11.9% when compared to the prior year quarter. And operating income for the Family Dollar segment increased $34 million to $107.4 million. Excluding the prior year receivable impairment, operating income decreased 70 basis points to 3.9%.
Non-operating expenses for the quarter totaled $230.2 million, which was comprised primarily of net interest expense and cost associated with the recent refinancing of the company's debt. Our effective tax rate for the quarter was 22.6%, compared to 36.1% in the prior year period. The lower rate is a result of the Tax Cut and Jobs Act, which lowered the federal rate to 21% from 35% in the prior year.
For the first quarter, the company had net income of $160.5 billion or $0.67 per diluted share, compared to the prior year net income of $200.5 million or $0.85 per diluted share in the prior year's quarter. This year's Q1 included $0.52 of cost associated with our debt refinancing, and last year's Q1 reported earnings included $0.13 receivable impairment charge. Excluding these items, adjusted EPS grew 21.4% to a $1.19 from an adjusted $0.98 per share in the prior year's quarter. Today's press release includes a reconciliation of non-GAAP financial measures for details on the adjustments.
Combined, cash and cash equivalents at quarter-end totaled $475.2 million, compared to $1.1 billion at the end of fiscal 2017. Our outstanding debt as of May 5, 2018, was approximately $5 billion, a decrease of $123 million from a year ago. During the quarter, the company entered into a new credit agreement consisting of a $1.25 billion revolver and a $782 million term loan facility. Additionally on April 19, the company completed the registered offering of $4 billion in several tranches of investment grade notes. The company used to proceed to repay its acquisition notes.
Connection with the refinancing, the company paid $114.3 million of prepayment fees, expensed 41.6 million in unamortized non-cash deferred financing cost, and incurred a net $4.6 million of interest on the new notes prior to the repayment of the acquisition notes. These one-time costs as detailed in the reconciliation of non-GAAP financial measures and sales earnings release reduced GAAP EPS for Q1 by $0.52 per diluted share. The company expects to save approximately $48 million in annual interest expense going forward. The interest savings for Q2 to Q4 fiscal 2008 will equate to approximately $0.13 of earnings per share.
Inventory for the Dollar Tree segment at quarter-end increased 7.9% from the same time last year, while selling square footage increased 4.3%. Inventory for selling square foot increased 3.4%. We believe the current inventory levels are appropriate to support the scheduled new store openings and our sales initiatives for the second quarter.
Inventory for the Family Dollar segment at quarter-end increased 16.9% from the same period last year and increased 14% on a selling square foot basis. At quarter-end last year, inventory was down 3% total and 4.2% on a selling square foot basis. The increase levels in the current year represent our continued work to support in stock levels as well as the inventory for several category resets.
Capital expenditures were $180.9 million in the first quarter versus $110.3 million in the first quarter last year. For fiscal 2018, we are planning for consolidated capital expenditures to range from $875 million to $890 million consistent with our initial 2018 outlook.
Depreciation and amortization totaled $151.6 million for the first quarter and $153.9 million in the first quarter last year. For fiscal 2018, we expect consolidated depreciation and amortization to range from $610 million to $620 million.
Our updated outlook for fiscal 2018 includes the following assumptions. Calendar considerations for the year include the following: 2018 is a 52-week year, the 53rd-week in Q4 of 2017 added $406.6 million of sales, and approximately $0.21 to earnings per share. Halloween shifts from Q4 into Q3 in 2018. We expect continued pressure on store payroll based on state's increasing minimum wages. Additionally, as previously discussed, we continue to invest on store hours and average hourly wage rates as part of our $100 million investment into our business from our projected $250 million tax benefit. We expect higher freight and diesel costs to continue. These costs are trending higher than our original guidance, and we reflected that in our updated outlook. We will continue to work to mitigate these increases as we go forward.
Net interest expense will be approximately $47 million for Q2 through Q4. Our guidance does not include any share repurchases. We cannot predict future currency fluctuations. We've not adjusted our guidance for changes in currency rates. Our guidance assumes a tax rate of 19.8% for the second quarter and 22.2% for fiscal 2018. And weighted average diluted share counts are assumed to be 238.7 million shares for Q2 and 238.9 million shares for the full-year. For the second quarter, we are forecasting total sales to range from $5.47 billion to $5.57 billion, and diluted earnings per share in the range of $1.07 to $1.16. These estimates are based on a low single-digit same-store sales increase and year-over-year square footage growth of 3.3%.
For fiscal 2018, we are now forecasting total sales to range between $22.73 billion and $23.05 billion based on a low single-digit same-store sales increase and 3.7% square footage growth. The company now anticipates net income for diluted share for full fiscal 2018 will range between $4.80 and $5.10, compared to the company's previously-expected range of 525 to 560.
The updated annual guidance range includes the following factors: $0.52 per share of one-time cost associated with the company's first quarter debt refinancing, $0.13 per share of benefit related to expected interest expense savings from the refinancing, $0.04 per share of benefit for an expected reduction in the second quarter corporate tax rate and $0.09 per share of expected cost from continued pressure related to freight and shrink expense.
I will now turn the call back to Gary.
Thank you, Kevin. We continue to focus on and make meaningful progress to grow and improve our business for both banners. Now we are well-positioned in the most attractive sector of retail to deliver continued growth and increased value for our long-term shareholders. The combination of nearly 15,000 Dollar Trees and Family Dollar stores provides us the opportunity to serve more customers in all types of markets. The combination of these two great brands provides great flexibility in managing our future.
Now, to the timing shift of the holiday and colder-than-normal-spring weather behind us, we have seen a pick-up in sales trends at both Dollar Tree and Family Dollar in May. It's still early in the quarter, but it's gotten off to a positive start for both banners, and I'm pleased with a kick-off to the summer season. We expect to continue to see pressure on freight cost, both inbound and outbound for the foreseeable future. We are taking action to minimize the impact of these costs. Also, we are seeing diesel cost run higher than a year ago, and higher than we had planned. Both of these cost pressures are included in the outlook.
Our ocean freight rate negotiated in April came in lower than originally planned. We should begin to see the benefits of the lower-than-anticipated rates in the back half of the year. This was also contemplated in our updated outlook.
As we detailed last quarter, we are investing in our business with more labor hours in the stores, more competitive wages and benefits, and in-store standards. We are investing in these specific areas because we believe they will drive our business and create a better opportunity for our stores. I'm counting on our teams to be able to drive a better experience and more sales. Our Q1 performance was a bit of two stories, the Dollar Tree segment, strong, resilient, relevant bounced back after the weather and planned for and overcame an early Easter. I was really pleased with all of our teams' efforts and achievement. Family Dollar was impacted particularly hard by weather in two our seasonal assorts in the spring, apparel and lawn and garden.
In comparison, Family Dollar consumables business comped positive in Q1. I'm please with the results and efforts we are making in rebuilding our brand in relevance to our customer around a better shopping experience, greater value and convenience as demonstrated by Family Dollar's good start to the second quarter. As we move into the summer season our store field teams, merchants and support teams are focused on our initiatives and the basics to deliver our banner and company goals.
Operator, we're now ready for questions.
Thank you. [Operator Instructions] Our first question comes from Matthew Boss with JPMorgan.
Great, thanks. I guess, Gary, on the Family Dollar front, how best to think about same-store sales in the quarter maybe versus your internal plan? And if we took a multiyear view here, is there anything structural that you've identified with the concept that changes the way that you look at the productivity opportunity today maybe versus how you did a year or two ago?
I don't think so. I think we're still -- Matt, we're still building the business. It's obviously fragile. So I think for this low income customer that we serve in particular areas of Family Dollar when we do get disruption, which we could point to some of the weather impacts, our customer just doesn't buy some of the categories that I pointed out until she really needs it. And so when I take a look at Q1, part of it just being the fact that was the weather, I think there's nothing structurally. We see the renovations continuing to make progress as we change what the customer sees in the fleet of stores. We continue to see private brands drive our business when we changed the labels and introduced them to our stores. And we're going to continue to invest in stores. And that's a little bit of labor. It's going to be the capital that we invest. That's going to be the long-term structural change.
I think as I take a look at Q1 to Q2, and I can point to the things that impacted our sales across those categories, great. Now that's one -- guess what, the warmer weather items are selling like we thought, and had the swing from what we saw in Q1 to driving some of the positive comps that we're seeing at the start of Q2. So it's, to me, it's everything we've talked to at the beginning, what are the fundamentals that are going to drive our customer value, let's get our pricing right. That's everything that Smart Ways to Save brings to the party across our store from being EDLP to private brands to $1 Wow, let's improve the store experience. And some of that's going to be capital with changing the fleet. And at the end of the day it's going to be investing in our store folks so we can run great stores in all 8,000-plus Family Dollars.
Great. And then, Kevin, on gross margin at the Family Dollar concept, asides from the sales-related occupancy de-leverage this quarter, which is -- if that makes sense, can you just walk through any differences versus your plan on the gross margin front at Family Dollar, and how best to think about this line item and drivers as the year progresses?
Yes, Matt, I think obviously the other big callout is shrink really for both banners, but as I noted in our prepared remarks, both banners were affected by approximately 30 basis points negatively in gross margin [technical difficulty] which is very significant from our perspective. So we have to -- obviously our teams are engaged and working to understand the issues. The one thing about shrink is once you see a trend it does take a little while typically to reverse one of those trends. So that again plays into the way we think about going forward the rest of the year. So that's obviously a big game changer from my perspective.
The other thing is, obviously we've spoken to freight; it's trended a little higher than what we spoke to at the beginning of the year. Again, a lot of it being related to driver issues which then basically affects backhauls as well and the efficiencies we're able to gain or not gain from that. So those are the two areas that would probably be the callouts that I would say.
Thanks. Best of luck.
Thank you. Our next question comes from Michael Lasser with UBS.
Good morning. Thanks a lot of taking my question. So when we look at the spread between Family Dollar same-store sales and Dollar general same-store sales that were also reported this morning, that expanded to 320 basis points. And we have seen pretty steady expansion in that spread for the last couple of years now. And it's not a completely clean number, but it really is the only way that we have to benchmark the influence of the teams having over its own performance. So why do you think that spread is expanding and was larger in the first quarter than it's been in some time?
Hey, Michael, it's Gary. Let me take this one. I think everything we have our teams working on are going to be the fundamentals over the long-term change that dynamic. So, it starts with the top line, everything that we do to drive that ought to be showing up in comp stores sales. I think in Q1 though this, for our Family Dollar, where our customers are served in urban settings; it is my opinion their shopping habits, travel patterns get more disrupted perhaps more easily with some of the weather. And if you're low income you don't buy some of the segments that we have, apparel being the biggest one that says when you buy short sleeve and dresses for Easter and when there's snow on the ground it just doesn't work the same way at the Family Dollar store.
So I sort of want to bucket Q1 into the things that we can sort of point to because we could see the categories that were impacted by the weather. And when we compare year-over-year the segments that were out there that should've been performing you could see, "Oh, well, there's another winter storm." So that's a piece of it. I think structurally, longer-term; it's still everything we've been talking about. We've got to continue to have renovated stores that will drive comps. Those are the elements that behind comp stores sales or any banner at the end of the day will help us drive comps. What they'll do is improve the adjacencies, get the right square footage in store for the right departments. That's just the work that's out there that we have to do to improve comps structurally quarter-over-quarter.
So Q1 is what it is. We've cinched our belts up a notch going into the summertime. We believe we had the right assortment, and when it got a bit warmer we started to see that respond. So we're not going to judge it by one quarter, we're going to take a look at the whole year with our plans, and continue down the path of the things that we know our customer responds to, which is a better store because it's been renovated or expanded frozen food doors because I get more of the assortment I need. And along way we're taking a look at the assortments and categories to create more value in there whether it's more private brand or whether it's assortment gaps that we need to improve. And that would never stop. And along the way, for us at Family Dollar and Dollar Tree, it still drives a lot of it based on what we do once a year on going on our import trips by season. We go multiple times a year of course.
But I think when you take a look at the Dollar Tree comp, of 4% year-over-year with those headwinds, this is -- that same kind of energy can work at a Family Dollar. Customer relies on us more on basics. She does need us at the beginning of the month and in a different way at the end of the month, but it's going to be those fundamentals that drive a more consistent comp over time.
And presumably a piece of the equation with Family Dollar is a lower penetration of the coolers and freezers and some of the consumable products that drive traffic. But do you have any plans to accelerate and really act with a greater amount of force to roll out more coolers and freezers to provide more consistency in the traffic for that business?
Well, I think we have a pretty aggressive project plan this year between both banners. We're going to be touching well over a thousand projects. I think we are doing it in an accelerated fashion both with the renovations, which are bigger projects at Family Dollar, along with the impact of additional doors mainly around frozen foods, exactly to your point. So that's in the hopper, and that's what we're continuing to work on for this year. So I think it's a key point, our customer does rely on that category maybe more than others do because of what it does for both snacking and meal planning for her on a -- different weeks of the month. So that's in the plan.
Okay. Best of luck. Thank you.
Thank you.
Thank You. Our next question comes from Dan Wewer with Raymond James.
Thanks. Kevin, I just wanted to confirm that I heard correctly the Family Dollar inventory was up 14% per square foot, that that's correct. It looks like the projected payback in revenue and gross profit dollars is minimal. I just wanted to see if you could explain that. And then also if you think this significant inventory build is contributing to the higher shrink accrual of 30 basis points?
Yes, I mean, I think when we look at our inventory at Family Dollar, as we've said, we have been consistently working to improve in-stock levels, specially first of the month, being ready for that key time to service that customer. And so that's always been something, as well as the fact that, as I mentioned, several category resets going on currently which has elevated some levels of inventory for that. So the expectation would be as we go through the year that will come back down. And as I pointed out, the other point being is we were actually down a year ago, at this point in time, 4.2% on a selling square foot basis as we were going through some of the changes. So, all in all, I think inventory is where we would expect it to be.
As far as shrink, I mean obviously when you have more inventory in the stores, that can have an affect on shrink, I don't know that I would specifically say that's leading to shrink because, honestly, the shrink results are really for stores that are being inventoried since a year ago. And the inventory levels last year tended to be lower in general. So I don't know that that's exactly a cause, but it's something that we do keep our eye on because it can be an effect in the longer term.
Dan, I would just add my color to it. We did several measured tests in our Family Dollar stores. And listen, our customer research at the beginning of this said our customers are disappointed with anecdotes [ph]. And that's a function of supply chain. Sometimes it's a function of the replenishment we put into the store. We want and aim for specific categories to get meatier on the shelf. And so we're going to run year-over-year on a higher inventory level. Q1 also reflect some of the items that are in place to try to minimize the anecdotes as we do reset. So rather than linger, get the product in the store and that's part of what's driving up inventory too. But I think your last point is a real one. I mean, I would just tell you if I put my operator hat on, yes, I think we've got to bring down some of the inventory levels across some of the categories. And that ought to help shrink. The thing with shrink is you have a couple of good years or three good years and people -- it's not that they take their eye of the ball, but it becomes a priority further down their checklist, and we got to get it right back underneath sales and people development at both banners, quite frankly, as the things that we monitor on a weekly, monthly basis.
Hi Gary, just a quick follow-up, Smart Ways to Save has placed a big focus on private label, digital coupons, better end caps, et cetera, do you think we are now at the point where we need to get more aggressive in pricing for branded consumables in the Family Dollar segment to help bridge that sales deficiency?
I would tell you that we had some very good comps across some of the national brand categories and brands for Q1 despite the overall comp being down. It's never one arrow in the quiver, I think to me, it's our customers thrive and then survive at the end of the month many times, our lowest income customer. I think we can trade her up when she has some money in her pocket, but we can't stray too far promoting opening price point, and that's really what Smart Ways to Save was to basically put an umbrella over, and that says there's a number of ways to entice this customer.
You are right, we have to be right on every day pricing, and everything that we see shows us more competitive than last year at the same time. I think the merchant team has done a nice job, gaining some line on some of the right assortment. I think the private brands show our customer even greater savings, and our Smart Ways to Save is giving us some market intelligence to our customer, which she buys one from first of month to the end of the month. So, it's an umbrella for how we are going to go after this whole approach knowing our customer better, buying brands, enticing it with private label, and dollar allowance is going to be part of our DNA. Obviously it's been Family Dollar. We can certainly help it with our Dollar Tree business.
Great, thank you.
Thank you, Dan.
Thank you. Our next question comes from Paul Trussell with Deutsche Bank.
Good morning. I'm going to circle back to the top line questions asked and try to approach it just slightly differently. Gary, what do you calculate the impact of weather to the 1Q comp to be for the Family Dollar and Dollar Tree banners? And are you suggesting that the headwind to Family Dollar was significantly greater than Dollar Tree? And then just to confirm, the Family Dollar comps, are they positive quarter-to-date? I think that's what you mentioned, and just want to know how you are thinking about deals and Dollar Trees top line over the balance of the year, and I guess at the crux of the last part of the question is how does your outlook on the health or the spending power of your core customer changed at all?
Yes, comps are positive as we -- let me start with that. And the weather does impact Family Dollar more around those two big categories as I mentioned; Dollar Tree doesn't have an apparel department, really it's a bigger category obviously at Family Dollar. At lawn and garden at Family Dollars everything that we sell in charcoal and grills and what people buy when the weather gets nice. We have a different market, different customer segment, and we're going to have different product at Dollar Tree. I think it's quite frankly remarkable that Dollar Tree merchants, operators, field teams, I mean comp with an early Easter and knowing what we are faced with snow on the ground in March, I mean really my hats off to the team, it's one thing to plan it, but the team executed that, and that was really pleased. And Family Dollar for all those reasons, private being our customers, if you don't have a car, your bus line gets disrupted, you are shopping differently. So I would say that the things that I point to for our customer, and I don't know how to think about the health of our customer, you know, if your our customer maybe tend to be impacted more by apartment rents, which we've seen go up more, fuel is up, lots of our customers arriving in buses to work and to stores obviously and we are all of us still about cars like anybody else up in that part of the world, but I'd sort of point to this customer when she has money and we have the right offering, we have seen it respond and that's a difference between the banners.
I think how do we overcome that over time? I think goes back to what we've been working off. It's being convenient. It's getting the stores renovated, so that was a reason to go there, it's what's new at our Family Dollar. So besides being right on the basics that spark that we got to have in our store on the merchandizing piece, some of that is tied to the seasonal, some of this is going to be closed down, some of it's just going to the stuff we invent, because we can when we go over to Asia and find some new products. So it's a combination of those things that will build the strength of the Family Dollar brand over time.
And for Dollar Tree, I mean, I feel like our folks are on it, they have the right agenda items in front of them. We don't like where shrink is for either banner right now, but we view that as a controllable expense. We've got to get back to the basics on that, and then drive that down from the impact that we are seeing this year. So what's how I'm thinking about it, and like I said we are pleased with how Q2 is starting out, because the same categories that sort of kicked this in Q1, we saw respond at the beginning of Q2 here.
And what synergies if any are you still taking advantage of and see flow into the P&L this year? And what are your updated thoughts on Family Dollar's EBIT margin potential and the timetable and the comp needed to get there?
Well, let me tell, the synergies towards the kick off around really the big buckets were identical similar match on items, it was the read banners, so Family Dollars to Dollar Trees. It was going after our indirect product, and a smaller portion was around logistics. At least that we have been able to take advantage of, one DC that's now co-banner. So, as we kick this off and work through that, those elements are in our P&Ls for both banners as we march forward. It doesn't mean we don't stop taking auctions together or finding opportunities to get cost down to system, but really we get one bite at the apple for synergy number. And so, the teams work together now to leverage vendors, to find the right vendors, to find people that need capacity to go to the market on the merchandize side, same on indirect.
And the read banners while we're going to do a sprinkling of them this year, they'll be more of an opportunistic. I think to go back to your question we said we will be able to get back to historical levels, and we have got to be able to do that by driving that top line sales number and to me the underpinnings of that are going to be renovations, new stores. Now we are doing about 300 new stores a year, yes, I think ultimately you want a bigger number of Family Dollar stores coming out of the pipe in that. So, as we slowed it down to make the -- do the needed work we needed to on adjacencies and work and that's part of our renovation, that's how new Family Dollar opens up now. As that fleet changes, that will give us some stability and top line comps over time.
The work that's going to go on, on the merchandizing side won't stop, but it's going to be underneath the umbrella of Smart Ways to Save on the elements that we've been talking about this morning. So we're still in the path there. The things that we signed up for the beginning are still there, but to get there, we do have to invest in the facilities and the stores, or people too, and keep driving the incredible values that we need for our customers to give them the reason to come into our Family Dollar at the beginning of the month and the end of the month.
Thanks for the color. Best of luck.
Thank you. Our next question comes from Scot Ciccarelli with RBC Capital Markets.
Hi, guys; Scot Ciccarelli. I guess, it's a little bit of a follow-on to Paul's question. According to your proxy, you guys have already exceeded your synergy target, and so I guess if I could -- if you could provide just a little bit more color, Gary, in terms of what you are talking about, are there still more costs to extract with Family Dollar or the way you guys kind of thought about synergies, or is it as you start to -- I think start to imply you really need to generate sales growth and natural leverage to drive significant bottom-line improvement at Family Dollar. Just what's the right way to think about it, cost coming out or is it kind of natural leverage and we got to get the top line to generate that?
Well, Scot, I think as we think about it, it always starts with driving top line, for sure, but we always have been a very cost conscious business and to your point on the synergy, we stated from day one, the expectation of achieving $300 million in run rate synergies at the end of three-year.
To your point in the proxy, we did note that it had been certified that we had a long-term performance plan related to it -- $450 million had been achieved. As part of that, we reinvested some of those dollars as we went along as well to improve the business and move it forward as you would think we would. We've had some significant success in the areas of indirect spend, cost of goods sold and banner optimization, you know, exceeding our targets in those areas. And so that was very good. But so now we're really about 30 days away from hitting that three-year mark and we're really transitioning from what we would call synergy initiatives to what we would really call our normal process as it relates to cost savings and process improvement that have been a long part of our performance based culture here at Dollar Tree.
So I think those type of things, to Gary's point, will continue. We'll continue to work on various processes in cause and issue, we're just not going to speak to synergies anymore, that's kind of run its course at this point in time and -- but to your point, those things will continue, it's very important to us. But we do really need to drive top line to get where we would like to get from -- in the long-term with our margin.
Understood. Okay, thanks, guys.
Thank you. Our next question comes from John Heinbockel with Guggenheim.
So Gary, two things, maybe related, probably not, how would you assess store conditions at Family Dollar today? Obviously, in-stock is most important, but just overall shopability, how would you assess that, where do you think with the investments you're making in labor how much improvement do you think you can achieve here as we head out maybe into 2019?
And then secondarily, the shrink at Dollar Tree, where is that coming from be it product category or process or bucket? And I guess, that would be with us for a while, right until you do more physicals?
Well, let me start with the store conditions at Family Dollar. They've improved and I would give our store teams and field teams credit. Are we fragile or are we perfect, no, we still have a ways to go, and it's a little, you know, we run our stores with sometimes minimum coverage. And so a truck gets late or the bus shows up with customers, we can be at risk. But I think the fundamentals that we're building around how do we think about building a schedule, the work to be done, and it sort of speaks to your second question then where do you invest in a Family Dollar on the labor side. And this isn't rocket science. This is about getting our stores stocked, it's getting them phased out and recovered and taking care of customers primarily. And it's how do we drive each of those buckets to maximum efficiency. So, on our investment, we're not trying to peanut butter every store everywhere. We're really trying to invest in the stores that we see upside, because of sales trends and our opportunity to invest in labor specifically around those categories to drive the difference.
Now, beyond that the facilities along the way, we made an investment too. Cleaner floors, not deferring maintenance, getting our hands around all the things that work against our own best interests sometimes when we do that. So we've always tried to manage in real time, but we've also tried to say over the long run what is it you need for our customers who ought to have a better shopping experience. So those are some of the elements the team at Family Dollar have been working on. And there's upside with the right investment in store labor, both Dollar Tree and Family Dollar. At Dollar Tree, sometimes it's as simple as let's move the freight from the back room to the sales floor and the comp comes. And at Family Dollar, it's some of that, but it's also let's work on getting the adjacencies right, the renovations, the things we're doing around the stores with the renovation and new store program. So it comes down to both of those.
Shrink, to me, I could give you lots of different reasons, but I sort of boil it down to we got some forward-looking score cards that tell us where the issues are. We got to get into them when there's smoke not fire. And it's a matter of reacting to basically the data that we see staring ahead of us. And you're right, I mean, we're through 50% of our inventories, so we don't see much of a runway to impact this year. But everything we're doing now is going to impact next year's performance. And that's why you can never stop working really, really hard on shrink. So that starts at store level and goes all the way up the food chain. I think our folks got the right information data to make a difference. And we're counting on them to do that over the next six months for next year.
Okay, thank you.
Thank you, John.
Thank you. We have time for one more question from Chuck Grom with Gordon Haskett.
Hey, thanks, just a couple of questions here on the guidance, Kevin, kind of following up on Paul's earlier. I just want to see if you guys are still comfortable with positive comps in the remainder of the year across both banners. And then on the gross margin line, I think, back in March you said down 20 to 30 basis points. I was wondering if you could update that line item for us.
Obviously, we give guidance on an enterprise basis as it relates to our comps as we've said, low single-digit comps. So we're obviously comfortable with that. As it relates to gross margin, I think there probably is a little more pressure than what we had initially said obviously with the fact that shrink as well as trade are obviously up in the gross margin category and given what we've seen there and what we've talked about today, there'll be a little bit more pressure within that line item going forward.
And then just on the weather issue, I'll try another crack at it. A number of retailers have sort of backed that out or tried to back it out, just wondering if the first quarter seasonal business, apparel business had trended similar to what you're seeing today, any sense for what Family Dollar would have comped in the first quarter?
Well, I don't know. It's a game of what ifs. But I know it's a big enough impact on Q1 that it was -- it's part of why we had a negative comp. I mean, that and lawn and garden I can almost put a fence around and say those were the issues. And I think when it gets warm it pops as it should. And I think that's -- tells me we got some of the right things out in store and our customers who find it, because she does need it now, short seat short fit. I went back to some of our weeks when in March you're -- some of your better categories are long-sleeved hoodies and tops. That's not a good thing for [technical difficulty]. So I think we saw that switch now as we got into May and into the traditional shopping patterns.
Okay. And then just one last one, just bigger picture. And obviously, before you acquired Family Dollar, there was a number of issues, some of which were price. Some of it was execution and then a lot of people thought it was real estate. You've done a really good job on price, I think table stakes initiatives based on our checks look great, which kind of leaves real estate as the problem. And I'm wondering -- you know, I don't want to look at first quarter and run with it too far, but do you think there's a real estate problem with the FDO segment? And if so then how do you address that in the timelines you've set to address it?
I won't say a problem. I think the opportunity that we saw going in was -- there's a number of different store formats out there that don't give the right square footage the right departments, which is what part of the renovation program does. And over time, it's a fleet of stores at -- some stores come up every year on lease renewal. So while it's a bit of -- the pieces are on the chessboard, over time, we can take advantage of where we think we ought to be and perform the best. But I would say -- you know, I don't know how to put a proportion to it. Part of it was going to be getting the opportunity to put stores where we want them with the new store program. They'll be closing down stores that aren't performing for whatever reason. But I think the more exciting part of the business and the reason we did this was the opportunity to drive renovations in the new stores where we want. That's the top side and really where we see the opportunity for Family Dollar.
So all those other things you talked about, yes, get the pricing right, get the execution better in store, let's invest in the store. Over time, those are the things in retail that tend to come back and drive store performance. So, we are not taking our sights off those important elements as we go forward.
Okay. Thanks very much.
Thank you. I would now like to turn the conference over to Mr. Randy Guiler for closing remarks.
Thank you, Jonathan, and thank you for joining us for today's call, and especially for your continued interest in Dollar Tree. Our next quarterly earnings conference call to discuss Q2 results is scheduled for Thursday, August 30, 2018. Have a good day.
Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.