Dollar Tree Inc_ (DLTR) Q4 2017 Earnings Conference Call Transcript

Dollar Tree, Inc. (DLTR 0.04%)
Q4 2017 Earnings Conference Call
March 7, 2018, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Dollar Tree, Inc. Fourth 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.

Randy Guiler -- Vice President of Investor Relations

Thank you. Good morning and welcome to our call to discuss Dollar Tree's performance for the 14-week fourth quarter and the for the 53-week fiscal year of 2017. On today's call with me will be 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 included in today's press release, our most recent 8-K, 10-Q, and 10-K, which are all on file with the SEC. We have no obligation to update our forward-looking statements and you should not expect us to do so.

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 Gary Philbin, Dollar Tree's Enterprise President and Chief Executive Officer.

Gary Philbin -- Enterprise President, Chief Executive Officer

Thank you, Randy, and good morning, everyone. This morning, we announced our results for the 14-week fourth quarter of fiscal 2017. Sales increased 12.9% to $6.36 billion. Our consolidated same-store sales increased 2.4%. By segment, comp sales for the Dollar Tree banner increased 3.8%. For the Family Dollar banner, comp sales increased 1%. This represented our 40^th consecutive quarter of positive same-store sales for the Dollar Tree banner. That's every quarter for the past ten years. It also represented our third straight quarter of positive comps at Family Dollar, as we continue to make progress on rebuilding the business.

Our enterprise gross margin rate improved 90 basis points to 33%, operating income increased 30.5% to $765.6 million, and our operating margin rate improved 160 basis points to 12%. GAAP earnings per share increased 221.3% to $4.37. There were multiple discreet items during the quarter, including the impact of tax reform, which Kevin will share more detail on in his prepared remarks. Our adjusted EPS was $1.89, a 39% improvement from prior year's quarter, and at the top end of our $1.80-1.89 range of guidance.

I'm proud of our team's performance in the fourth quarter and our results for 2018. We have a dedicated team of associates across each of our business segments that drive our customer engagement and deliver the following results.

For Dollar Tree, the banner delivered a solid 3.8% comp along with a 50 basis point improvement in its sector leading operating margin. The Family Dollar banner delivered its third consecutive quarter positive same-store sales, along with a 6.8% operating margin, a 280 basis point improvement from Q4 last year. Our Dollar Tree Canada team delivered another solid quarter of strong sales coupled with improved margins and leveraged expenses. Our Dollar Tree Direct business delivered double-digit comp sales in both sales and visits to our websites.

In our Dollar Tree banner for the fourth quarter, our top performing categories were our Christmas assortment, which had a terrific Holiday season, candy, snacks, beverage, household consumables, beauty, and eyewear. Our sales performance was very balanced with discretionary, slightly outperforming consumables. Both of them comped up more than 3%.

All three months comped positively, with November being the strongest month. Geographically, Dollar Tree same-store sales growth was strongest in the Southwest, West, and Midwest. And, all of our zones delivered positive comps greater than 2%.

Customers continue to be thrilled with Dollar Tree's unique fixed price point concept, and the business continues to be strong, consistent, and growing. As I mentioned, this is the 40^th consecutive quarter of positive same-store sales, and our operating margin of nearly 17% for the quarter continues to lead the value sector. Our fourth quarter performance again validates the strength of the Dollar Tree brand. Customers love the value and convenience of shopping at Dollar Tree. We are very pleased with the traffic and sales results, our merchandising assortment, and the flow of inventory. Our business model continues to focus on our customers' wants and needs, and our shopping experience is unique. Customers find it compelling as compared to other retailers.

In our Family Dollar banner for the fourth quarter, our top performing categories included our refrigerated and frozen foods sections, school and office supplies, and bedding. Our comp performance was again driven by consumables. And comp sales cadence through the quarter was positive each month, with November and January being the strongest months.

Geographically, Family Dollar same-store sales growth for the quarter was strongest in our West, Mid-Atlantic, Mountain West, and Southwest zones. Importantly, all eight of our major geographic zones delivered positive comps.

Since the acquisition, much of our focus at Family Dollar has been around our table stakes initiatives, to improve store standards. Feedback continues to come from our shoppers, that indicate they are seeing cleaner stores, greater values on the items our customers buy most often, improve product assortments, more consistent in-stocks, and better customer service in our stores.

The combination of value and convenience is the foundation for the Family Dollar business. Our stores are the place to stop for basic fill-in needs for our customer's shopping list. The nearly 8,200 Family Dollar stores across 46 states are conveniently located in markets and neighborhoods where many of our primary customers live, work, and shop. Our stores are easy to shop and provide terrific values in every aisle.

We deliver our value message to our customers through our Smart Ways to Save program. Whether you visit a Family Dollar store, view a marketing circular, or check on our website, you'll see the consistent value messaging. The Smart Ways to Save includes our EDLP pricing for everyday value, price drops that reflect meaningful value on promotional items throughout the store, our $1 Wow, which drives for price and value at an opening price point in our stores, and Compare & Save, which calls on great values on our private brands.

And, supporting our Smart Ways to Save is our Smart Coupon program, which was launched chainwide on Labor Day of 2016. After just 18 months, we have more than 5.3 million customers that have opted in to receive Smart Coupons. Our recently introduced Family Dollar mobile app makes it easier for customers to use Smart Coupons. We've seen more than 2 million customers download the app, and we're receiving strong reviews on both Android and IOS systems. Visits to the web and app have doubled from the prior year.

I'm very pleased with the progress of upgrading our private brand assortment in the stores. These private brands are being developed to provide national brand comparable quality and terrific values to support the Compare & Save component of our Smart Ways to Save program. Our customers know they can count on the quality with our 100% customer satisfaction guarantee.

Examples of changes we've already made in our consumables aisle include the Family Gourmet brand that's been replaced with such brands as Catawba Candy Company, eats and salty snacks, cookies, Chestnut Hill, grocery prepared, and some refrigerated and frozen food items. The Family Dollar brand has been retired in household products, such as laundry, cleaning, and paper, and replaced with our new Homeline brand.

We've introduced two new brands to auto and hardware, Driver's Choice and Tool Bench. Within our health and beauty assortment, we've redesigned our look for Family Wellness, Modesa, and Kidgets! brands. We've also added some new brands such as Nature's Measure in vitamins and Daxton in men's personal care.

In 2018, the next phase of our private brand initiative will focus on discretionary brands in home, housewares, and general merchandise. During the fourth quarter, we completed another 75 Family Dollar store renovations, bringing our 27 (sic) total to 377. We continue to be very pleased with the initial results we are seeing in these newly renovated stores, especially about the feedback we're receiving from our customers and store teams.

Elements of the improved store layout include better shopping [audio cuts out] and more productive end caps, expanded beverage and snack, including immediate consumption coolers near the checkout, an assortment of food in coolers and freezers, update haircare assortment, expand adult beverage in select stores, a shopper friendly power alley to promote $1 Wow items, and a faster checkout for our customers. Besides the renovation stores, tall of 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.

For Canada, our highlights include our focus on running great stores. Our merchants continue to source exceptional values and product, and our operators are delivering on brand standards in our stores. The discretionary side, in particular, of our Canadian business, continues to perform well. Our top performing categories include HBC, candy, toys, and crafts. We continue to be focused on our goal to be recognized as the leading single price point retailer in Canada at C$1.25, just as we are $1.00 in the US. We currently operate 225 stores in Canada and continue to see the opportunity for our 1,000-store vision of stores over all the Canadian provinces over time.

At Dollar Tree Direct, our web presence and selling site for the Dollar Tree banner, provides and opportunity to enhance our customer base, drive incremental sales, extend brand awareness, and encourage store visits. It was another productive and profitable quarter for Dollar Tree Direct as we experienced double-digit increases in sales and site traffic. More than half of our traffic to dollartree.com was from mobile devices. Our online videos earned more than 2.4 million views during the quarter, highlighted by our new product videos associated with our million-dollar brands.

In December, we launched our first ever Tacky Sweater Contest, which promoted our Holiday decorations and wearables, of course at the incredible price of $1.00. In January, we distributed our 2018 spring catalogue directly to key customers and to all of our Dollar Tree stores, touting our Spring dinnerware, Easter, spring cleaning, and lawn and garden products. Our customers can now find great values, new items, and seasonal excitement at dollartree.com and familydollar.com, and even more offers just for them with the new Family Dollar app.

Now, turning to real estate in the fourth quarter. We opened up a total of 137 new stores, 51 Dollar Trees, and 86 Family Dollars. We relocated or expanded eight stores -- four Dollar Trees and four Family Dollars. We renovated 75 Family Dollar stores as part of the renovation initiative, for a total of 220 projects during the quarter. We also added freezers and coolers into 77 Dollar Tree stores during the fourth quarter, now bringing our total to 5,207 Dollar Tree stores with freezers and coolers. During the quarter, we closed 46 stores -- five Dollar Trees and 41 Family Dollars. We ended the year with 14,835 stores -- 6,650 Dollar Trees and 8,185 Family Dollars.

For 2018, our real estate plans include 650 new stores -- 350 Dollar Trees and 300 Family Dollars -- renovations of at least 450 Family Dollar stores, relocations or expansions of approximately 100 stores, and approximately 50 rebanners from Family Dollar to Dollar Tree. Cooler and freezer expansions in 500 Family Dollar stores and the addition of adult beverage to [audio cuts out] stores -- and, adding freezers and coolers to 500 new and existing Dollar Tree stores.

We are pleased with our results and enthusiastic about the opportunities ahead of us. I'll now turn the call over to Kevin to provide more detail on our fourth quarter performance and our initial outlook for Q1 and Fiscal 2018. Kevin?

Kevin Wampler -- Chief Financial Officer

Thanks, Gary, and good morning. Sales and earnings were favorably impacted by an addition of a 14th week in the fourth quarter, consistent with the 53-week retail calendar. The extra week contributed $406.6 million to sales and approximately $0.21 to earnings per share. Total sales for the fourth quarter grew 12.9% to $6.36 billion, within our guidance range of $6.32-6.43 billion. Dollar Tree segment total sales increased 14.5% to $3.32 billion, and Family Dollar total segment total sales increased 11.1% to $3.04 billion. Enterprise same-store sales increased 2.4% on a constant currency basis, or 2.5% when adjusted for Canadian currency fluctuations.

On a segment basis, same-store sales for the Dollar Tree banner increased 3.8%, or 3.9% when adjusted for currency fluctuations. The Family Dollar banner increased 1%. Gross profit for the combined organization increased 16.3% to $2.1 billion for the fourth quarter of 2017 compared to the prior year's quarter. As a percent of sales, gross profit margin improved 90 basis points to 33% versus 32.1% in the prior year's quarter.

Gross profit margin for the Dollar Tree segment was 38% for the fourth quarter, a 50 basis point improvement compared with the prior year's fourth quarter. Factors impacting this segment's gross margin performance during the quarter included lower occupancy costs as a percent of sales due to the leverage from the extra week of sales and comp sales gain, and lower shrink and markdowns compared to the prior year's quarter. These were partially offset by higher freight costs.

Gross profit margin for the Family Dollar segment was 27.6% during the fourth quarter, compared with 26.3% in the comparable prior year period. The 130 basis point improvement was primarily due to lower markdown expense as a result of a continued focus on improving our promotional and clearance markdown strategies and lower occupancy costs as a percent of sales, primarily due to the extra week.

Consolidated selling, general, and administrative expenses as a percentage of net sales in the quarter improved 70 basis points to 21% from 21.7% in the same quarter last year. This includes a $35 million recovery from Sycamore Partners related to our Dollar Express settlement and includes $12.6 million of expense related to a change in recording our Dollar Tree worker's compensation reserves on an undiscounted basis. Excluding the two items noted, SG&A as a percent of sales improved 40 basis points for the quarter.

Fourth quarter SG&A expense for the Dollar Tree segment as a percentage of sales was consistent to the prior year at 21.1%. Excluding the $12.6 million of expense related to worker's compensation noted previously, SG&A improved to 20.8% of sales. The improvement was driven by a lower depreciation of the leverage from the sales from the 14th week, partially offset by higher store payroll costs.

SG&A expense for the Family Dollar segment as a percentage of sales was 20.8% compared to 22.3% in the prior year's quarter. The 150 basis point improvement was a result of a 120 basis point positive impact from the $35 million receivable impairment recovery, lower repair and maintenance costs, and lower depreciation costs, partially offset by higher incentive compensation in our retirement plan contributions and increased advertising costs.

Operating income for the enterprise increased to $765.6 million compared with $586.5 million in the same period last year. Operating income margin improved 160 basis points to 12% for the quarter from 10.4% in last year's fourth quarter. Excluding the previously mentioned net benefit of $22.4 million, adjusted operating margin was 11.7%.

Operating income margin for the Dollar Tree segment improved 50 basis points to 16.9% when compared to the prior year quarter. Operating income for the Family Dollar segment increased $95.2 million to $205.6 million, a 280 basis point improvement as a percentage of sales when compared to the prior year's quarter. Excluding the Dollar Express receivable impairment recovery, operating income increased 160 basis points to 5.6%.

Nonoperating expenses for the quarter totaled $74.1 million, which is comprised primarily of net interest expense of $81.6 million, partially offset by $7.5 million of income for recognition of the completion of all requirements for the forgivable promissory note issued by the State of Connecticut for the construction of our Windsor, Connecticut distribution center in 2012.

Our effective tax rate for the quarter was a benefit of 50.4% compared to an expense of 35.3% in the prior year period. The current year benefit is a result of the Tax Cut and Jobs Act, which lowered the federal corporate tax rate from 35% to 21% and made numerous other law changes as of January 1, 2018.

Our Fiscal 2017 included 34 calendar days in calendar year 2018. Therefore, the overall 2017 statutory rate for the year was 33.7%. The effective tax rate also included a $562 million noncash benefit resulting from the remeasurement of our net deferred tax liabilities, to reflect the lower statutory rate. The total benefit from the Tax Cut and Jobs Act to the fourth quarter was $583.7 million.

For the fourth quarter, the company had net income of $1.04 billion, or $4.37 per diluted share, compared to the reported net income of $321.8 million, or $1.36 per diluted share in the prior year's quarter. Last year's Q4 reported earnings of $1.36 per share, including $0.03 of expense for the write off of amortizable non-cash deferred financing costs incurred during Q4 of 2016.

The company estimates that the 53rd week in Fiscal 2017 represented a benefit of approximately $0.21 per diluted share. Adjusted EPS for the quarter was $1.89. Today's press release includes a reconciliation of non-GAAP financial measures for the details on the adjustments.

Looking at the balance sheet, combined cash and cash equivalents at year end totaled $1.1 billion compared to $866.4 million at the end of Fiscal 2016. Our outstanding debt as of February 3, 2018 was approximately $5.7 billion, a decrease of $644 million from the prior year end. On March 1, 2018, the company prepaid $750 million of 2020 notes. The prepayment included a redemption premium of $9.8 million, which was included in interest expense in the fourth quarter.

Inventory for the Dollar Tree segment at quarter end increased 12.1% from the same time last year, while selling square footage increased 4.8%. Inventory for selling quarter foot increased 7%. We believe that current inventory levels are appropriate to support the earlier Easter selling season, scheduled new store openings, and our sales initiatives for the first quarter.

Inventory for the Family Dollar segment at quarter end increased 9.4% from the same period last year and increased 6.5% on a selling square foot basis. We're pleased with the progress we're seeing on in-stock levels on key items. We continue to review merchandise assortments and believe our current inventory levels are appropriate for the first quarter.

Capital expenditures were $182.8 million in the fourth quarter of 2017, versus $113.2 million in the fourth quarter of last year. For Fiscal 2018, we are planning for consolidated capital expenditures to range from $875 million to $890 million. Capital expenditures will be focused on 650 new stores, 100 remodels, along with the renovation of 450 Family Dollar stores, the addition of frozen or refrigerated capability to a total of 500 new and existing Dollar Tree stores, the expansion of frozen or refrigerated capability to 500 Family Dollar stores, and the addition of adult beverage to 700 stores, IT system enhancements and integration projects, installation of LED lighting in approximately 3,000 stores, the completion of construction of a new Dollar Tree banner distribution center in Warrensburg, Missouri, the start of construction on Dollar Tree DC-15 and additional automation projects, and the completion of our Chesapeake store support center expansion.

Depreciation and amortization totaled $156.6 million of the fourth quarter. Depreciation and amortization expense was $155.5 million in the fourth quarter last year. For Fiscal 2018, we expect consolidated depreciation and amortization to range from $610-620 million. This includes $59 million for Fiscal 2018 for the amortization of favorable lease rights for the purchase accounting valuation of Family Dollar leases, compared to $69 million in the prior year.

The company benefited in the fourth quarter and Fiscal 2017 with respect to the Tax Cuts and Jobs Act. We expect to continue to benefit going forward, and estimate the benefit to be approximately $250 million for Fiscal 2018. We plan to invest approximately $100 million as follows: Invest in our stores with more hours in stores, including training for associates; invest in our people with increased average hourly rates; add our Family Dollar eligible associates to the defined contribution plan, starting in Fiscal 2017, and increase contributions in 2018; establish paid maternity leave for eligible associates. The $100 million investment in the business is included in our company outlook.

Before I speak to our assumptions included in our 2018 outlook, I want to outline adjusted earnings results for Fiscal 2017. As shown in the reconciliation of non-GAAP financial measures in the earnings release, adjusted EPS for the year was $4.86. Additionally, in 2017, we benefited from the following: $0.21 per share for the 53rd week, a $0.04 benefit per share for a Q2 tax item, and $0.02 per share in Q4 related to the Windsor, Connecticut DC forgivable promissory note. This results in an adjusted EPS for Fiscal 2017 of $4.59.

Our initial outlook for Fiscal 28 (sic) includes the following assumptions -- calendar considerations for the year include the following: 2018 is a 52-week year, and again the 53rd week in Q4 2017 added $406.6 million to sales; Easter will be two weeks earlier this year, representing an estimated $13 million headwind to Q1 sales; and Halloween shifts from Q4 into Q3.

We expect continued pressure on store payroll based on states increasing minimum wages and general average hourly rate increases. We have budgeted higher freight costs and diesel costs than a year ago. Out outlook currently includes a headwind of approximately $68 million, or $0.22 in earnings per share related to these costs. We will continue to work with our transportation partners to mitigate these increases as we go forward.

Net interest expense will be approximately $70 million in Q1 and $60 million for Q2-Q4. Included in Q1 interest expense is approximately $6.1 million, or $0.02 per diluted share for the acceleration of non-cash deferred financing costs related to the redemption of the 2020 notes, which I spoke to earlier. Our guidance does not include any share repurchases. We cannot predict future currency fluctuations, so we have not adjusted our guidance for changes in currency rates.

Again, our 2018 guidance does include the investment of $100 million into our business of the projected $250 million tax benefit. Our guidance assumes a tax rate of 23.1% for the first quarter and 22.9% for Fiscal 2018. Weighted average diluted share counts are assumed to be 238.5 million shares for Q1 and 238.9 million shares for the full year.

For the first quarter, we are forecasting total sales to range from $5.53-5.63 billion, diluted earnings per share in the range of $1.18-1.25. 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, a 52-week year, we are forecasting total sales to range between $22.7-23.12 billion, and diluted earnings per share in the range of $5.25-5.60. These estimates are based on a low single digit same-store sales increase and 3.7% square footage growth.

With that, I'll turn the call back over to Gary.

Gary Philbin -- Enterprise President, Chief Executive Officer

Thank you, Kevin. Again, I'm pleased with our performance for the fourth quarter and throughout 2017. I'm extremely proud of our combined Family Dollar and Dollar Tree teams. We continue to make meaningful progress to grow and improve our business. We're well positioned in the most attractive sector of retail to deliver continued growth and increased value for our long-term shareholders.

Our company is now a diversified combination of 6,600 single price point Dollar Trees and 8,100 neighborhood Family Dollar stores, each with its unique ability to effectively serve more customers through all types of markets. This combination of two great brands provides great flexibility in managing our growth.

I'd like to describe our investment in business that Kevin detailed by line item in his comments. Our view is to take a portion of the tax savings to invest in the business while the majority of the savings will drop to our bottom line earnings and positively drive earnings per share. This is a unique opportunity to invest where our customers will see the greatest impact when they shop a Family Dollar or Dollar Tree store.

We're going to invest in our people. I believe hiring more associates at store level, driving more hours into our stores, will create a better shopping experience. As you've heard us describe before, a direct link to our store managers who can best drive the business for their stores and be rewarded with higher bonuses. We will approach this with the same discipline to invest in the right seasons and weeks of the month, like we do any other project, and we'll measure it as we put the hours into specific stores.

Also, training for associates at store level. Departmentally, for our store managers, they have such great influence on their teams and our success. Our best stores managers, almost without exception, are run by our veteran store teams, led by great store managers. Investing in rates of pay. The current levels of unemployment in some geographies have put pressure on wages, both at our distribution centers and stores. We believe we can find the right levels to keep and attract the best people to drive our success.

The productivity that our experienced associates drive into our business delivers the bottom line results that we've been proud to report. Investing in associate benefits. Smaller in scale, but just as important, establishing a maternity leave program with details to be soon announced to our full-time associates, and including our Family Dollar team members in our profit sharing program. Investing in our families that provide service to families in their neighborhoods will make Dollar Tree and Family Dollar the employer of choice in the communities we serve.

Our profit sharing program contributes to our full-time associates and directly links our company goals to drive shareholder value to the teams to that drive customer engagement. We will also be investing in certain Family Dollar stores that need to be brought up to brand standard.

We're investing in these specific areas of our business because we believe they will drive our business and create a better opportunity for our stores to perform across a spectrum of customer engagement stores that reflect our brand standard. I'm counting on our teams to be able to drive a better shopping experience and more sales.

Finally, I recently joined our Global Sourcing Teams on their important post-Holiday overseas buying trip with both Dollar Tree and Family Dollar merchants. It was a successful trip and we met our planned margin goals. Our teams continue to effectively develop our direct to factory partnerships, shop the market, procure great values, and improve our supply chain and quality control standards.

Dollar Tree is well recognized and well respected overseas as a successful growth retailer. Our company has developed experience and expertise in sourcing, and we are leveraging these assets across all banners. The retail environment, ever changing, provides both banners opportunities to take advantage of our customers' wants and needs. Our management team has demonstrated over the years the ability to be nimble and deliver results when challenged by the external environment. Our initiatives at both banners have helped to deliver on sales, margins, expense control, and ultimately customer satisfaction. We're proud of the progress we have made and are enthusiastic about the opportunities ahead of us.

...

Operator, we're now ready for questions.

Questions and Answers:

Operator

Thank you, sir. [Operator instructions] We'll go first to Robbie Ohmes of Bank of America Merrill Lynch.

Robert Ohmes -- Bank of America Merrill Lynch -- Analyst

Good morning. Gary, I was hoping you could talk about what you're seeing in the momentum of your customer. Has there been any slowdown? Maybe work into that momentum with your customer, thinking about gas prices being up a bit versus last year. Maybe whether you are or aren't seeing any kind of trade up in some of your categories. And then, maybe even some color on, in the markets where labor is tighter and wages are going up, do you see differences in your same-store sales versus markets where that isn't happening? Thanks.

Gary Philbin -- Enterprise President, Chief Executive Officer

If I were to take a look at Q4, you saw some of the categories. On the Dollar Tree side, our seasons are punctuated by the Christmas season -- the biggest holiday we have -- was just terrific. Credit to the assortment, the excitement in stores, it showed up with great sell through and we could not have been more pleased with the seasons. We have always laid down that the hurdle we want to jump every year is, every season we come to, we want to jump over. Certainly, the team did in the fourth quarter.

And, for Dollar Tree, it continued into the Valentines -- a little bit of a smaller holiday, but a great impact there. I would say our mix that we saw in the fourth quarter, consumables and discretionary, are at a race for each other and are comping great. That mix has continued into the beginning of this year. We're going to overcome and work our tail off in an early Easter, with winter storms still hitting both coasts. Not thrilled with what March does to an Easter holiday. But, on the Dollar Tree business, we see the same kind of momentum.

At Family Dollar, we did a lot of redos this year. If you went into a Family Dollar store, you saw more brands around toys and some of our reinvention of what our customer saw there. And, the customer responded favorably. Some of that was a trade up. So, we continue to refine our business around a holiday. The consumables are driving the business at Family Dollar. As always, it's the magic of bringing in the seasons, the Wow, whatever we can do there.

Now, we go into the beginning of this year, we're driven a lot by the tax credits that our customers get. They backed up another few days this year, so we're really at the beginning of that. So, we'll see how our customer responds through March with a few more dollars in her pocket.

As far as wage pressure, it's hard for us to a see a difference in comps. I would say it's more driven by -- if we deliver great value in our stores, no matter what neighborhood, we tend to get a lift in that community and that store. Our investment in our people speaks to our opportunity to continue to drive our business by having folks well trained, staffed in store, and drive the shopping experience. For both banners, when we put those links together, we end up in a good place.

Robert Ohmes -- Bank of America Merrill Lynch -- Analyst

Just on gas prices, have you seen any changes in momentum related to the higher pump prices year-over-year?

Gary Philbin -- Enterprise President, Chief Executive Officer

Well, it puts pressure on the lower end customer. It's gas prices and rents are up in most markets. You're never tickled when you know that your customer is under pressure on those things. But, I can't tell you that it's affecting us in terms of basket, because we've seen that tend to grow at both banners. Family Dollar traffic is a little flatter than Dollar Tree, so we're still split between an urban customer that probably is more walk-in and more mass transit versus rural that does have to get into a car.

I would say it's hard to define what we're seeing on gas prices effecting the customer right now. I do know this, it's a few more bucks out of their pocket. It's a few more bucks out of their pocket on rent. So, we're very focused on the values up and down the store shelves.

Robert Ohmes -- Bank of America Merrill Lynch -- Analyst

Great. Thanks very much.

Operator

We'll go next to John Heinbockel of Guggenheim Securities.

John Heinbockel -- Guggenheim Securities -- Analyst

These are two related questions. Number one, if you think about the reinvestment of the tax benefit is clearly the right thing to do, can you get your arms around an ROI on the $100 million, particularly with a lot of retailers adding hours and raising wage rates? Or, is it just something that you know is the right thing to do directionally but you really can't tell what the benefit is relative to your competition.

Secondly, if you think about those investments and what's happening with freight, is your view on the trajectory of the Family Dollar margin turnaround changed? Does it get pushed out a little bit because of those pressures?

Gary Philbin -- Enterprise President, Chief Executive Officer

I think on the first piece, you're spot on. You heard all the CapEx initiatives, and we're very disciplined on every dollar we put down on the CapEx side, whether it's stores, frozen food, or adult beverage. All of those are measured with ROIs. Now, we're going to invest in people with the $100 million. We're going to go into it with the same sort of business savvy that says where do we get $1.50 back if we invest $1.00. It doesn't always work quite that way. I think our investment in our people ought to show up with better run stores, stores that are better in stock, stores around seasons and the first of the month, and that have what our customer needs.

So, some of this is a downstroke in my mind, to help us get our stores on a trajectory. While ROI is doing some of this, we are in the value sector that I think we have the best chance to have our customer respond more quickly to it. So, we're going to measure it. It's going to be targeted by -- it's going to be sometimes down to the weeks of the month around key holidays, and to specific stores that we think we can drive additional business in. So, we're going to track it. It's just maybe not as clean as we track our capital projects as we go through the year.

The freight side is a real thing right now, and it's a component of some of the driver shortages, and we'll see how long that lasts and where we are on diesel fuel. Diesel fuel is back to the future 2015 -- we're almost starting to the same price per gallon. It leveled out. We'll see what happens this year. I'd like to think maybe there is some relief in the back half of the year. The driver piece is a little more complicated for all of our third party partners. They have to find enough folks to service. We certainly have commitments with all of them. We're a great customer to have. We can put a lot of folks to work in that arena. We serve a known quantity and we're growing. The growth we can give folks as they hitch their wagon to our engine is at least a place for us to build a future that allows us to leverage that.

But, nearer term, we're going to have to overcome this freight piece. We're looking and asking our logistics team inside transportation -- how do we make DCs more productive? When we hit these bumps in the road from an external force on the outside, it's all hands on deck. We've given you our best forecast and what we know baked in, and now we're going to work our tails off to overcome it.

John Heinbockel -- Guggenheim Securities -- Analyst

Okay. Thank you.

Operator

[Operator instructions] We'll go next to Matthew Boss of JP Morgan.

Matthew Boss -- JP Morgan -- Analyst

Thanks. At Family Dollar, gross profit dollar is up 16%, best performance in recent history. How should we think about the progression of comps versus gross margin going forward? Is what we've seen so far, low single-digit comps and outsized gross margin, the last couple of quarters in line with your strategy to date? How should we think about the sales per square foot opportunity from here at Family Dollar?

Gary Philbin -- Enterprise President, Chief Executive Officer

Thank you, Matt. We can always do better. One comp for the quarter at Family Dollar, frankly we went in with plans that we would do more. What are the things that are going to drive comp for the Family Dollar business? It comes down to the merchandise. Everything you've heard us talk about on the marketing and merchandising plans is getting back to the EDLP. Winning back customers that have confidence in us on pricing -- private brands and more import. You've heard us talk about those things. It's all under our Smart Ways to Save.

The other piece that's a slower burn is to change some of the stores that the customers see. It's a two-prong attack. One piece is let's get new stores out there. This year is another 300 new stores that will be next generation stores. The renovations we were pleased with last year. We accelerated. We'll do more this year. Over time, that's what's going to change both the productivity on sales per square foot and continue to help the margin mix and enhance as we get the stores that start to sell a better mix of product.

So, it's a combination of what we can do tactically on merchandise, marketing, and touching our customers. Strategically, it's also about how we have to get the right store format network across 8,200 stores, and many of them older than some of you on the call. It's going to be over time that we get to change those and change neighborhood by neighborhood our customer.

I think, what you see on the margin piece, we need comps. Sales are slow ball issues and that's the focus of the Family Dollar merchandising team. Keep changing and work on the mix. Drive costs. Create value. And, over time, get the excitement in the merchandising so the mix starts to change as well. That's still the vision we started off with. We haven't changed our thinking at all. It is maybe sometimes slower than we would like; I know that. But, it's the combination of what we see on new store renovations, new store, and maybe the last exclamation on sales per square foot -- it's also how many stores we put into densely populated urban areas. The react distinctly different than a rural, small town Family Dollar. So, we're working on both sides of that coin to say how do we drive productivity in both of them in the mix of new stores that come out on any given year.

Matthew Boss -- JP Morgan -- Analyst

Great. On the expense front, underlying the $100 million tax reinvestment, what's the fixed cost hurdle that we should think about to leverage SG&A at both Dollar Tree and Family Dollar, both this year and going forward? Has anything changed on model flow through or the way that you think about investments, other than using some of the tax savings to reinvest this year?

Kevin Wampler -- Chief Financial Officer

I don't think anything has changed from a flow through perspective. If anything, over time, we would continue to see flow through improve on the Family Dollar side. This quarter, we saw gross profit improve significantly. Our outlook basically takes into consideration that continuing to improve to some level next year. So, the flow through is fine. Again, as we think about our fixed costs and what it takes to leverage those, we are still in that 2-3% range, roughly. It varies quarter-to-quarter, so I always want to think about it on an overall basis. I would tell you a net 2-3% range on a normal basis without the large investment we're making this year.

Gary Philbin -- Enterprise President, Chief Executive Officer

Maybe what's changed is that the investment we're talking about is going to affect up income with a flow through coming down to EPS. But, I really think the downstroke on improving the shopping experience is going to be the magic sauce for us as we continue to improve both banners and what the shopping experience can be for both.

Matthew Boss -- JP Morgan -- Analyst

That's great. Best of luck.

Operator

We'll go next to Karen Short of Barclays.

Karen Short -- Barclays Investment Bank -- Analyst

Hi. I just wanted to clarify something in terms of backing into your EBIT margin guidance. If I look at Fiscal '17, excluding the extra week, I get an 8.8% EBIT. If I look at your guidance range for Fiscal '18, excluding the $100 million investment, I get 8.9-9.3% as a margin range. Is that ballpark?

Kevin Wampler -- Chief Financial Officer

You're directionally correct on the 2017 year, excluding the 53rd week. We'd tell you that's right around that 8.85% adjusted. And then, excluding the $100 million? Basically, yes. We would be showing improved operating margin. That's part of the investment we've made, so that's the pressure point, as well as the freight. But, yes. Operating margin without the $100 million would be increased year-over-year.

Karen Short -- Barclays Investment Bank -- Analyst

Right. And it's about 40 basis points with the $100 million.

Kevin Wampler -- Chief Financial Officer

Yes.

Karen Short -- Barclays Investment Bank -- Analyst

Okay. Gary, you made a comment that, out of the $250 million, you're investing $100 million and the rest is going to flow through. To clarify, in terms of your CapEx, when I look at your CapEx dollars as a percent of sales in '17 versus your CapEx dollars as a percent of sales in '18, it does look like it's increasing by about 100 basis points. It seems to me that a lot of that additional $150 million is actually going to CapEx. Is that the right way to look at it?

Gary Philbin -- Enterprise President, Chief Executive Officer

No. Karen, I would tell you that, whether there was tax reform or not, our CapEx number did not change, basically. We did not make any changes to our decisions of how we were investing in our CapEx related to tax reform. These projects were already on the planning board and in flight stages prior to tax reform. It did not have an impact on our decisions related to that.

Karen Short -- Barclays Investment Bank -- Analyst

Okay. Of the $100 million, you did say some of this is retroactive to '17 for the Family Dollar defined contribution plan? Could you give us what that dollar amount is?

Kevin Wampler -- Chief Financial Officer

Yes, that's approximately $5 million.

Karen Short -- Barclays Investment Bank -- Analyst

Oh, it's small. Okay. Thank you very much.

Operator

We'll go next to Scott Ciccarelli of RBC Capital Markets.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Good morning, guys. Lots of moving pieces with the vehicle you talked about and incremental investments. But, that's the right way for the investment community to think about the Family Dollar operating margin for 2018? Obviously, you're trying to balance these incremental investments versus what should still be synergy benefits. Can you provide any more color on that?

Kevin Wampler -- Chief Financial Officer

Yeah, as we think about the operating margin for our Family Dollar business, we do expect to see continued improved in our overall product margin. We've done a good job the last half of this year controlling our markdowns in a much better way. As we go forward, we'll continue that. That's an important aspect of it. That will help more than offset, hopefully. We'd look for our gross profit to increase in our Family Dollar banner in 2018. And then, SG&A is a little bit of pressure from the fact of the reinvestment. If you look at the overall reinvestment of about $100 million, it's slanted about 60% Family Dollar and 40% Dollar Tree. We'd have to take that into consideration. So, on an overall basis, we would look at operating margin to be flat to up a little bit in our family dollar business.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Related to that, you guys have talked about synergies and the spending against it. Any change in the trends of either of those? Are we still getting toward the end of the investment piece of that?

Gary Philbin -- Enterprise President, Chief Executive Officer

Yeah, as we've spoke to synergies, the expectation is the achievement of a $300 million run rate by the end of three years, which would be July 2018. We called out the reinvestment, which was roughly $300 million. As we've stated, it's been more CapEx than OpEx. But, yeah, we're on track. No major changes in the cost side of that. It's pretty much winding down. We did announce additional -- up to 50 rebanners again this year from Family Dollar to Dollar Tree, so there will be a little bit of CapEx there that will continue to flow through. But, it's down to fairly minimal amounts.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Got it. Thanks, guys.

Operator

We'll go next to Dan Binder of Jefferies.

Daniel Binder -- Jefferies & Company -- Analyst

Good morning. Around Family Dollar, the division has benefited tremendously on the sourcing side from the combination of Dollar Tree and Global Sourcing, etc., which has led to a fair amount of gross margin expansion. However, the comps for sales have been a little bit lighter than you expected. As you think about that equation going forward, do you feel like there's an opportunity to take some of that gross margin and be a bit more aggressive on the price side to help get the comps to sales tracking to a higher rate?

Gary Philbin -- Enterprise President, Chief Executive Officer

I think you're right. The efforts we've made on the synergy side and like item, both merchandising teams did a great job of getting us out of the blocks quickly on that piece. The import piece, we've had a couple of buying cycles now, but I still view it as an opportunity to find the right suppliers -- more factory direct to help us. It's a two-pronged effect. You get better costs and you can find some exciting product, which is part of the merchandising energy we want to keep working on for both banners, and get going on the Family Dollar side.

Those are the types of things that will help drive comps. Our price checks -- we're more competitive than we were when we started this journey. I can't read the future. We're not going to work in a vacuum. But, as we see the environment right now, it's not the same noise that we heard at the beginning of the year, as we saw lots of activity mainly on the grocery side. For our side, the values we want to present to our customer -- what she buys most often in a Family Dollar are the items that we want to have on the shelf and on promotional.

It's partially when do we invest in the ad to give the customer savings above and beyond with a price drop, part of it's what's left on the shelf, and part of it is what she gets on her app now. With 5 million folks signed up, it's that customer information that, over the long run, gives us another arrow in our quiver on giving our customers exactly what they need on the purchase cycles they're on.

So, we're going to go into this year with a great marketing plan. We have our thoughts around how we want to reflect pricing every day on shelf and what gets put into the cycles with our vendors and what we want to drive on private brands and imports. It's a long way of saying we're going to drive our business by segment of the market the way we think it's appropriate. We have more than one way of doing that as we go into '18.

Daniel Binder -- Jefferies & Company -- Analyst

Could you clarify what the $7.5 million in other income was?

Kevin Wampler -- Chief Financial Officer

Yeah, as we noted in our comments, we had a forgivable promissory note related to the State of Connecticut that, once certain things were met, it became forgivable. So, that had been on our books as a debt instrument and it was forgiven. So, it comes through other income.

Daniel Binder -- Jefferies & Company -- Analyst

Thanks.

Operator

We'll take our final question from Chuck Grom of Gordon Haskett.

Charles Grom -- Gordon Haskett Research Advisors -- Analyst

Good morning, guys. If I include the $100 million of investments and the $68 million in freight and diesel, it looks like operating margins are going to be down 50 basis points. Is Family Dollar expected to be flat year-over-year? How do we back into that down 40 for the total company? Kevin, if you also could just address how you see gross margins playing out in 2018 relative to SG&A? It sounds like groceries are going to be relatively stable. Could you provide some color on that?

Kevin Wampler -- Chief Financial Officer

Looking at the operating margin overall for the year, at the midpoint, you may be down 40 basis points at the upper end. I think you're down something less than that, so you have to think about it from that perspective. At the midpoint, yes. You would probably see pressure on both banners operating margin. At the upper end, you'd see a little less on the Family Dollar side. It's a lot of moving pieces as it relates to the investment. We've laid it out and we'll work on how we execute to that at the end of the day.

As we look at it, gross margin -- we look at product margin itself to be positive as we go into 2018. Obviously, the pressure point is the freight. We look at markdowns to be an area where we can make some inroads into how we operate there. That's more Family Dollar dominated than Dollar Tree, as you might imagine. So, that's a piece of it. Otherwise, it would also help us to have distribution and occupancy costs -- you heard Gary say that, as we look at the moving pieces of supply chain, while we know there's pressure on the transportation side, we know we need to get more productivity through our buildings. That will be one of the places we'll be looking to improve for the year, as well.

As we look at our gross profit overall, we're looking at the midpoint of guidance. There will be some pressure on that of probably 20-30 basis points, basically. On the SG&A side, it's going to come down to how it all looks at the end of the day from the standpoint of how we're able to drive sales and leverage it. With the investment, there is some pressure there. We'll see a little bit more pressure on SG&A. I would hope that we could drive some sales and leverage them a little bit better from that. That is part of what we're looking for in the reinvestment in the company, to drive sales to help leverage the fixed costs as we go forward.

Gary Philbin -- Enterprise President, Chief Executive Officer

Let me just give my color at a 40,000-foot level. Our merchants on both sides -- we see a sightline to exciting product on imports and continuing to drive value with our domestic partners that show up on our shelves in both banners. The pressure on the freight side, like I start off with -- we're going to work very hard to overcome, every way we know how, what seems to be a this-year issue. We'll see. At least it's upon us now and we're going to work hard on that.

On the SG&A side, we are investing on the labor and we'll see the natural pressure. But, we're investing in it to maybe get ahead of it. All I know for sure is that, when I got good store managers and field managers driving the excitement, we do better. That's the downstroke we're making to get ahead of it and I'm begging on our store teams to rise to the occasion and drive the results that can help us overcome whatever is out there on the SG&A side. But, part of it is just selling the right mix of product to help us on the freight side, too. That's the plan as we go into '18.

Charles Grom -- Gordon Haskett Research Advisors -- Analyst

Gary, it sounded like you were striking a little bit more of a cautious tone on the consumer and potentially your comp trends. Is it right to interpret that way? Are you seeing anything over the past few weeks that has you more concerned today than back in November when you provided 3Q?

Gary Philbin -- Enterprise President, Chief Executive Officer

No, I'm always concerned about our customer and how she's shopping. I think my reference point was on the tax credit refunds that are happening. They were pushed back another week from last year. It's the 13th holiday we have at Family Dollar on top of the other 12 first-of-the-months. We're at the beginning of that holiday, and that was my reference point in talking about the Family Dollar customer.

On the Dollar Tree side, she's loving everything we're doing on the holidays right now. Kudos to our team, but the energy in the Dollar Tree store really feels good and is showing up on our seasonal holiday sales.

Charles Grom -- Gordon Haskett Research Advisors -- Analyst

Okay. Thank you very much.

Operator

That is all the time we have for questions. At this time, I would like to turn the call back over to Randy Guiler for any additional or closing comments.

Randy Guiler -- Vice President of Investor Relations

Thank you for joining us on today's call and especially for your interest in Dollar Tree. Our next quarterly earnings conference call to discuss Q1 results is scheduled for Thursday, May 31, 2018. Thank you.

...

Operator

That does conclude our conference for today. We thank you for your participation. You may now disconnect.

Duration: 64 minutes

Call participants:

Randy Guiler -- Vice President of Investor Relations

Gary Philbin -- Enterprise President, Chief Executive Officer

Kevin Wampler -- Chief Financial Officer

Matthew Boss -- JP Morgan -- Analyst

Daniel Binder -- Jefferies & Company -- Analyst

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Charles Grom -- Gordon Haskett Research Advisors -- Analyst

Robert Ohmes -- Bank of America Merrill Lynch -- Analyst

Karen Short -- Barclays Investment Bank -- Analyst

John Heinbockel -- Guggenheim Securities -- Analyst

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