Dollar Tree, Inc. (DLTR) Q2 2018 Earnings Conference Call Transcript

Dollar Tree, Inc. (DLTR 0.04%)
Q2 2018 Earnings Conference Call
Aug. 30, 2018, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to Dollar Tree, Inc.'s second quarter earnings call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Randy Guiler, Vice President, Investor Relations. Please go ahead, sir.

Randy Guiler -- Vice President, Investor Relations

Thank you, Lisa. Good morning and welcome to our conference call to discuss Dollar Tree's performance for second fiscal quarter of 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 included in our most recent press release, most recent 8-K, 10-Q, and annual report, 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 to 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 President and Chief Executive Officer.

Gary M. Philbin -- President and Chief Executive Officer

Thank you, Randy, and good morning, everyone. This morning we announced our results for our second quarter. Sales increased 4.6% to $5.53 billion. Our consolidated same-store sales increased 1.8%. By segment, our comp sales for Dollar Tree banner increased 3.7% and the Family Dollar banners comps were flat compared to last year's Q2 increase of 1%. Our enterprise gross margin rate declined 70 basis points to 30.1%. Operating income was $382.5 million or 6.9%. Diluted earnings per share increased 17.3% to $1.15, one penny below the high end of our guidance range.

In mid-July, our company hit a milestone by opening our 15,000th store. We celebrated the occasion with exciting offers and promotions at both Dollar Tree and Family Dollar stores, along with coordinated grand opening celebrations at select stores across the country. Also in July, we opened up our 23rd U.S. distribution center, located in Warrensburg, Missouri, on time and on budget. The 1 million square foot facility is creating approximately 400 jobs in Western Missouri and will initially be serving Dollar Tree stores, but is equipped with the necessary systems to serve both Dollar Tree and Family Dollar banners in the future. The partnership and support we received from the State of Missouri, the City of Warrensburg, and the surrounding communities was just outstanding.

The Dollar Tree sales initiatives have been hitting on all cylinders. Dollar Tree has now delivered 42 consecutive quarters of same-store sales growth. In fact, each of the last 5 quarters, the increases have been greater than 3.5%. The last time Dollar Tree hit a streak of at least 5 consecutive quarters over 3.5% was in 2012. Our merchandise excitement continues to be driven by great values for a dollar, the discovery of what's new, and our efforts around our major holidays and seasons. Dollar Tree continues to grow its business around these important times of the year.

For our Dollar Tree banner in the second quarter, top-performing categories were snacks and beverage, candy, health and personal care, toys, and household consumables. Sales performance was balanced across discretionary and consumables. Comps were positive all three months. May same-store sales was the strongest month in the quarter. However, on a 2-year stack basis, July had the best monthly performance, as we had a very strong July in 2017.

Geographically, Dollar Tree same-store sales growth was strongest in the West, Southwest, and Midwest, and all of our zones delivered positive comps greater than 2.5%. With the Family Dollar banner in the second quarter, while we did not achieve our intended target on comps for the quarter, we continued to focus on the key initiatives that would drive the long-term success.

The important elements that will change the sales trajectory for Family Dollar are investment in the customer experience, including better in-stocks and assortment; more private brand offerings, along with better buying from our import capabilities; delivering value through our Smart Ways to Save; specific customer offers that are targeted through our Smart Coupon program; and most of all, around our efforts to renovate the stores with better adjacencies and merchandise impact of our important categories.

Top-performing categories in the quarter included beauty care, accessories, electronics, and snacks and beverage. Our comp performance in the quarter was driven by consumables, approximately three-quarters of our business at Family Dollar is consumable, needs-based products. We've comped again positively for 7 consecutive quarters.

For cadence in the quarter, comp sales were strongest in May. July was negative, but up against the toughest comparison from the prior year. Geographically, Family Dollar same-store sales for the quarter was once again strongest in our Northeast and West zones.

Switching to Canada, highlights for Dollar Tree Canada. Our team continued to deliver mid-single digit positive comps for the quarter, with increases in both traffic and ticket. The sales growth was balanced, as both discretionary and consumables comped better than 5% for the quarter. Top-performing categories in Canada included books, lawn and garden, candy, and greeting cards.

For Dollar Tree Direct, while small, less than 1% of our sales, it will continue to be an important part of our business. It provides us the tool to connect with our customers, enhance loyalty at Dollar Tree, and drive brand awareness. In Q2, we saw double-digit increases in both sales and website traffic to dollartree.com. Our efforts here are to connect with our customer and organizations help them find easily the solutions they need for bulk purchases, and the ability to buy first some of the early season's great values.

We continue to engage our customers in all forms of social media, with a growing base of fans and social interaction that includes creative videos highlighting the Dollar Tree product. Please check both of our websites, dollartree.com and familydollar.com.

Now looking at real estate in the second quarter, we opened a total of 146 new stores -- 82 Dollar Trees, 64 Family Dollars. We relocated or expanded 13 stores -- 10 Dollar Trees and 3 Family Dollars. We renovated 109 Family Dollar stores as part of our renovation initiative. We also rebannered 17 Family Dollar stores to Dollar Tree stores, for a total of 285 projects during the quarter. We also added freezers and coolers to 125 Dollar Tree stores during the second quarter, bringing our total Dollar Tree stores with freezers and coolers to 5,436 now. During the quarter, we closed 26 stores -- 3 Dollar Trees and 23 Family Dollars. We ended the quarter with 15,073 stores, split out with 6,812 Dollar Trees and 8,261 Family Dollars.

Before I turn the call over to Kevin, I just wanted to speak briefly about tariffs and the potential for additional tariffs that are in the news. So far, the United States Trade Representative has implemented tariffs against $50 billion in Chinese goods and is considering implementing 10% or 25% tariffs against an additional $200 billion in Chinese goods. This potential impact could be mitigated by a variety of factors. The USTR may reduce a list of impacted tariff lines before tariffs are implemented, and later may even grant specific product exclusions. We are and will be active in the process. We will not stand still. Like other shocks to the system, we will do what we have always done to mitigate impact. We can also attempt to negotiate price concessions, change prices, specifications, and evolve product mix. At Family Dollar, we can do all those things and we can also change our price. And, as always, we have always taken a look at alternative sources of supply and product outside of China.

I'll now turn the call over to Kevin to provide more detail on our second quarter performance and our outlook for Q3 and fiscal 2018. Kevin?

Kevin S. Wampler -- Chief Financial Officer

Thanks, Gary. Good morning. Total sales for the second quarter grew 4.6% to $5.53 billion, within our guidance range of $5.47 billion to $5.57 billion. Dollar Tree segment total sales increased 7% to $2.77 billion and Family Dollar segment total sales increased 2.3% to $2.76 billion. Enterprise same-store sales increased 1.8% on a constant currency basis, or 1.9% when adjusted for Canadian currency fluctuations. On a segment basis, same-store sales for the Dollar Tree banner increased 3.7% or 3.8% when adjusted for Canadian currency fluctuations and the Family Dollar banner comp was flat when compared to the prior year's quarter.

Overall, gross profit increased 2.2% to $1.66 billion for the second quarter of 2018 compared to the prior year's quarter. As a percent of sales, gross profit margin declined 70 basis points to 30.1% versus 30.8% in the prior year's quarter. Gross profit margin for the Dollar Tree segment was 34.5% for the second quarter, a 10 basis point decline compared to the prior year's second quarter. The decline was primarily due to 20 basis points of increased shrink cost, partially offset by improved merchandise cost net of freight. As sales mix positively impacted margin, offsetting freight headwinds.

Gross profit margin for the Family Dollar segment was 25.7% during the second quarter, compared with 27.2% in the comparable prior year period. The 150 basis point decline was primarily due to merchandise cost, including freight, which increased 85 basis points, resulting from higher domestic freight cost, partially offset by increased initial mark-on. Distribution costs increased 30 basis points due to higher merchandising and distribution center payroll-related costs. Shrink cost increased 15 basis points and occupancy costs increased 10 basis points, resulting from the deleveraging effect of flat comparable store sales.

Consolidated selling, general, and administrative expenses as a percentage of net sales in the quarter increased 30 basis points to 23.2% from 22.9% in the same quarter last year. Excluding the $2.6 million receivable impairment from the prior year's quarter, SG&A as a percent of sales increased 40 basis points from an adjusted 22.8% in the prior year's quarter. The increase was driven by higher store payroll costs, partially offset by lower depreciation and lower store repairs and maintenance costs as a percentage of sales.

Second quarter SG&A expense for the Dollar Tree segment as a percentage of sales increased to 23.7%, compared to 23.4% in the prior year's quarter. The increase was primarily due to our store hourly payroll cost, which increased 40 basis points related to our planned Tax Cut and Jobs Act savings reinvestment plan. SG&A expense for the Family Dollar segment as a percentage of sales was 22.6%, compared to 22.4% in the prior year's quarter. Excluding the $2.6 million receivable impairment from the prior year, Family Dollar SG&A as a percentage of sales increased 30 basis points from 22.3%. The increase was the result of a 55 basis point increase in store hourly payroll expense that was partially offset by lower repairs and maintenance cost and lower depreciation expense.

Operating income for the enterprise was $382.5 million, compared with $419.5 million in the same period last year, and operating income margin was 6.9%, compared to 7.9% in last year's second quarter. Operating income margin for the Dollar Tree segment declined 40 basis points to 10.8% when compared to the prior quarter. Operating income for the Family Dollar segment was $84.8 million or 3.1% for the quarter.

Non-operating expenses for the quarter totaled $44.8 million, which was comprised primarily of net interest expense. Our effective tax rate for the quarter was 18.9%, compared to 32% in the prior year period. The lower rate is the result of the Tax Cut and Jobs Act, which lowered the federal tax rate to 21% from 35% in the prior year, as well as an $8.1 million reduction in reserve for uncertain tax position resulting from statute expirations. For the second quarter, the company had net income of $273.9 million or $1.15 per diluted share, compared to reported net income of $233.8 million or $0.98 per diluted share in the prior year's quarter.

Looking at the balance sheet, combined cash and cash equivalents at quarter end totaled $647.3 million, compared to $1.1 billion at the end of fiscal 2017. Our outstanding debt as of August 4, 2018, was approximately $5 billion.

Inventory for the Dollar Tree segment at quarter end increased 8.5% from the same time last year, while selling square footage increased 4.6%. Inventory for selling square footage increased 3.6%. We believe that current inventory levels are appropriate to support the scheduled new store openings and our sales initiatives for the third quarter. Inventory for the Family Dollar segment at quarter end increased 15.6% from the same period last year and increased 12.9% on a selling square-foot basis. At quarter end last year, inventory was down 5.2% in total and 6.3% on a selling square-foot basis. The increased levels in the current year represent our continued work to support in-stock levels, as well as early receipts of certain holiday merchandise.

Capital expenditures were $213.4 million in the second quarter versus $161.4 million in the second quarter last year. For fiscal 2018, we are planning for consolidated capital expenditures to range from $850 million to $865 million, a slight decrease from our prior 2018 outlook. Depreciation and amortization totaled $152.6 million for the second quarter. Depreciation and amortization expense was $151.4 million in the second quarter last year. For fiscal 2018, we continue to 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 to sales and approximately $0.21 to earnings per share. Halloween shifts from Q4 into Q3. This shift favorably impacts Q3 from a revenue and earnings perspective but has no impact to same-store sales. We expect continued pressure on store payroll based on states increasing minimum wages. Additionally, as previously discussed, we continue to invest in store hours and average hourly rates as part of our $100 million investment into the business from our projected $250 million tax benefit.

We expect higher domestic freight and diesel costs to continue. These costs continue to trend higher that our original guidance and we have reflected this in our outlook. We continue to work to mitigate these increases as we go forward. The company, along with other retailers, recently learned of an anti-dumping duty assessed by the U.S. Department of Commerce on certain Chinese ribbon products. We expect to incur $0.04 per share of expense in our fourth quarter to account for the anti-dumping duty assessment. That interest expense will be approximately $47 million per quarter in Q3 and Q4.

Our guidance does not include any share repurchases and we cannot predict future currency fluctuations, so we have not adjusted our guidance for changes in currency rates. Our guidance assumes a tax rate of 21.5% for the third quarter and 21.4% for fiscal 2018. Weighted average diluted share counts are assumed to be 238.9 million shares for [inaudible] year. For the third quarter, we are forecasting total sales to range from $5.53 billion to $5.64 billion and diluted earnings per share in the range of $1.11 to $1.18. These estimates are based on a low single-digit same-store sales increase and year-over-year square footage growth of 3.4%.

For fiscal 2018, we are now forecasting total sales to range between $22.75 billion and $22.97 billion, based on a low single-digit same-store sales increase and 3.4% square footage growth. The company now anticipates that income per diluted share for the fiscal year 2018 will range between $4.85 and $5.05 and includes the previously mentioned $0.04 per share of anti-dumping duties, compared to the company's previously expected range of $4.80 to $5.10. I'll now turn the call back over to Gary.

Gary M. Philbin -- President and Chief Executive Officer

Thank you, Kevin. Over the past few weeks, I attended our annual field leadership meetings at both Family Dollar and Dollar Tree. It's our opportunity to connect with our field leaders face-to-face, teach and learn, recognize and reward individuals and the teams for superior performance and give service awards. We interact with our merchant leaders on sales driving initiatives, coach field leaders on people development, and ensure that we're all aligned heading into the important holiday season. We had very productive meetings and I'm pleased with the caliber of business men and women that are leading our field organizations. Our leaders are energetic, focused, and motivated going into this important back half.

For Dollar Tree, the banner is up against some great sales in the back half of last year, a 5% comp in Q3 and a 3.8% in Q4. Let me talk a little bit about the sales driving initiatives in place to successfully cycle these numbers. These include our Snack Zone. Last quarter, we provided initial details regarding this concept which we have been testing in Dollar Tree stores for some time. By the end of Q2, we have had Snack Zone up and running in more than 500 stores. Store and customer feedback has been terrific and the numbers support this.

We really like the lift we're getting in this new category within the store. The concept targets on-the-go customers with media consumption items. Snack Zone sales are consistently outperforming the sales lift targeted for them. A mid-single digit percent of the store sales are coming from the Snack Zone items. We plan to have the Snack Zone in at least 750 stores by the end of fiscal 2018. We're already in the development stage of Snack Zone 2.0, which can be rolled out to smaller Dollar Tree stores in 2019 and beyond.

Also, this week we are announcing an exciting new partnership that Dollar Tree has with the Hallmark company with our greeting cards. Over the past 3 months, we have rolled out Hallmark greeting cards to all of our Dollar Tree stores. The new greeting cards are Expressions from Hallmark, priced at $1.00, and the Heartline line of cards from Hallmark priced at $1.00 for 2 cards. All the cards are brand new and designed exclusively for Dollar Tree. These cards are tailored to be relevant to our customer base and our surrounding stores, and celebrate every type of occasion. I could not be more proud of how Hallmark, our merchant teams and store teams executed this transition flawlessly across 6,000+ stores. It brings a world-class brand into Dollar Tree. We're excited about this new partnership and encourage you to see our Hallmark cards being promoted on our website, in stores, and social media now that it's in every Dollar Tree store.

Additionally, our merchant teams continue to locate and source terrific buys that bring the thrill of the hunt to consumer. If you visit our stores now, you'll see that we are stocked and ready for business. We're winding down the summer and back-to-school offerings and already showing the new holidays ahead of us. Halloween, Fall, Harvest, we are entering the best time of the year for Dollar Tree to show what's new for the season.

At Family Dollar, we left our field leadership meeting with an emphasis on our store execution and consistency of delivering our Family Dollar brand standard. Our combined efforts to focus on driving a better store experience, along with the tools our store managers and district leaders need to win was the focus of our year-long efforts to drive better store-level traffic and conversion in store. The merchandising energy looked great and our teams are up for the challenge in the back half.

Our field leadership is focused on the elements that will win in the marketplace -- our investment in our people, our labor to drive sales, understanding sales impact and merchandising energy within their four walls, shrink control, and store growth and renovations. I've talked about our initiatives around Family Dollar -- the basics we are correctly focused on; a better customer experience; better in-stocks and store conditions; improved private brands along with the value compared to our national brand counterparts; import merchandise that allows such great value but also to bring the excitement to our store categories; focus on the value and convenience; our call-out for smart ways to save.

We've seen our customers respond around consumables, as we've had 7 consecutive positive comps in this important line of our business. Dollar Wow items throughout the store creates great price impact and speaks to our customer that many times need this assortment to make it to the end of the month with their budget. And renovations. The excitement around renovations speaks to the portfolio optimization when we take a look at our fleet of stores.

We have 8,000 stores. When we take a look at how we optimize across the fleet, we have our top volume stores that continue to produce a positive comp. We rebanner stores where our metrics show that we will do better as a Dollar Tree than as a Family Dollar. Then, as always, we take a look at the middle group of stores and target the renovations where we can drive better performance, both top line and bottom line. We're pleased with what we're seeing on the renovations. We had targeted 450 locations this year and we will do more. We're going to extend that to 500 this year. We can't do them through back half of October, November, December. But we will do 500 this year and are working on setting a higher target for 2019 renovations.

Our customers are buying more and the feedback gives us great confidence to move forward with more of these in the right stores. I believe the right combination of more renovations, along with the foundational elements of our strategy would drive the traffic and basket that we are looking for and really to make meaningful changes to our fleet of 8,000 stores. We continue to focus on making meaningful progress to grow and improve our business for both banners. I feel that we are well positioned in the most attractive sector of retail to deliver continued growth and increase value for our long-term shareholders.

The combination of more than 15,000 Dollar Tree and Family Dollar stores provides us the opportunity to serve more customers in all types of markets. This combination of two great brands provides great flexibility in managing our future growth. Our teams are ready for an important holiday season and are focused on winning their stores and markets as we enter the back half. Operator, we are now ready to take questions.

Questions and Answers:

Operator

Thank you, sir. If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you're using a speakerphone, please make sure your mute option is turned off to allow your signal to reach our equipment. Again, everyone, that is *1 to ask a question. We also ask that you limit you're to one question and one follow-up question and we'll pause for a moment. Our first question comes from Scot Ciccarelli with RBC.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Good morning, guys. Gary, you talked about the need to improve consistency at Family Dollar in terms of store appearance, organization, etc. That would certainly conform to what we've seen in our store tours. Do you think you've had the full buy-in from your Family Dollar employee base for all the changes that you're trying to implement? If not, how do you get that full buy-in from the associate base given the importance of their contribution to what should be improved financial performance?

Gary M. Philbin -- President and Chief Executive Officer

Thank you, Scot. I think you're spot on. At the end of the day, we do this ability a store at a time. It really speaks to, I think, two things. I would tell you our leadership zone, region, district, and our store managers that we recognize the ones with superior performance at our field meeting, they're on board. I think the consistency that I'm speaking to is how do we give them the tools to win in their box? I would tell you it comes down to a few things that have always been part of our elements to focus on. It's getting people trained correctly. That still remains the No. 1 priority in what we've invested in with our tax investment today.

Our store manager turnover, while stubborn, has come down a few points. That's against the backdrop of even a robust economy out there. If we were to say there's one element that combines great store performance, match that up with a store manager that has stayed in the saddle over a year, that's actually remarkable for both banners, our performance improves. So, we're focused on that. When we have store managers leave us before one year, we put our folks in that spot that tend to show up in stores and that lack of consistency. So, that's where we tend to see the cracks in the dam. So, we work real hard trying to understand why people leave us before a year both at Dollar Tree and Family Dollar. But the path is really the same for both. Hire the right folks, get them trained, work through their hurdles.

But the other piece, and you sort of touched on it, is renovations too. Which then, I think, gives us the chance to sort of jump-start and change that by store and district and region very quickly. That gives us the chance to go in and spend time with a greater touch in those stores to gain that consistency and the element that drives traffic and business into those stores. So, our focus on investing in our store managers is where we clearly have our eyes set. It was the theme of our meeting this year and it's where we expect to see progress over the next year.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Thanks, that's helpful. Can you just remind us when you started to raise wages for the group?

Gary M. Philbin -- President and Chief Executive Officer

Well, the investment we teed up this year. So, keep in mind we're always monitoring where we are by market. That goes back to even last year. I think we went into this year with a thought we didn't want to get behind the curve with unemployment now at 4%. People have opportunities. So, it's really location and specific markets that are tied to investments in our hourly workforce. And so, we've kicked that off this year in both banners. Putting a little bit of science behind it, with where are the markets that have the highest increases going on or can we affect our turnover in a better way because we give a higher starting wage to the folks that got to run the stores.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Okay. Thanks, guys.

Operator

Our next question comes from Vincent Sinisi with Morgan Stanley.

Vincent Sinisi -- Morgan Stanley -- Analyst

Good morning, guys. Thanks very much for taking my question. Just on the renovations at Family Dollar. Obviously, it has and continues to be a big focus for that banner. I know you haven't really quantified in the past, but can you maybe just directionally give us a little bit of sense from what you guys are seeing post-renovation how those stores are performing? Are there maybe fewer markdowns at some of those stores if you look from more of the margin end? That'd be helpful.

Gary M. Philbin -- President and Chief Executive Officer

Sure, Vinny. Thank you. Because we're excited about the renovations. And I maybe just want to go back to what I said in my comments. I think we've taken a hard look across all of our 8,000 stores. We've got a group of stores chugging along, giving us a positive comp. They tend to be our highest volume stores by nature. Our customers have been building business in there and continue to. We've rebannered some that are in between, but the stores in the middle that we can affect to drive comps in, we have an old fleet of stores and we've targeted some of the oldest in the fleet to go after that.

But more than that, I think what we're seeing with the renovations is increased traffic and basket. The merchandising layout is different enough in the store to get the customers to come in and really take a look at some everyday needs. We expanded frozen food, for instance. But we've also enhanced what we've done on our seasons at Family Dollar. Different than Dollar Tree. Summertime becomes much more of a grilling holiday at Family Dollar than it could ever be at Dollar Tree. We have our impulse items, both in our Wow tables and up in the front end. So, we're seeing really a remarkable pickup for that last dollar our customer might have on something that wasn't on their shopping list.

So, we've had mid-single digit comps in this growing fleet of stores. But as I sit back and take a look at this portfolio of stores, we've got to do more of them to effect change. That's really going to be our focus for the balance of the year. We're going to squeeze in another 50. I'll do more if we can. We'll be limited a bit by just the holiday. We try not to attempt to do too much in our stores after October. But we'll get to 500, maybe more. We have the confidence now with what we've learned to tweak it a bit and go into 2019 with a bigger number on that group of stores. That's going to be how we end up this year and the basis for kicking off '19.

Vincent Sinisi -- Morgan Stanley -- Analyst

Awesome. Super helpful. Maybe just as the follow-up, I'll stay on the same basic subject. Do you guys think that when you're making enhancements, core Dollar Tree is obviously the consistent machine, but when you're making enhancements either to that or particularly Family Dollar more, do you think in terms of what you're doing from an advertising perspective? I guess the heart of the question is, do customers realize as quickly as they can of the enhancements that you folks are making or do you think maybe there's even more that you could from that perspective as opposed to just next time they happen to be passing the store? Thoughts around that would be great.

Gary M. Philbin -- President and Chief Executive Officer

Great question. Unless you do something, your customers never realize what you've done. For Dollar Tree at the Snack Zones now, we get a banner out in front of the store. It's on the website. It's word-of-mouth. I would tell you I see people in the aisles actually Facetiming their family members at home because they found something in particular that was there. So, advertising at Dollar Tree is maybe unlike any other retailer. We want to show people that we have something new, but get a banner out in front and our folks find us. Family Dollar, fair question. I think it's store-by-store.

So, depending on the store and the market, we obviously do everything on the store level side to show customers. Whether that's pennants, banners, big grand openings. If a store is worthy in terms of what we think it can drive in sales, it probably gets its own ad to do exactly what you described, tell people what's new. Here's why you ought to come. So, we sort of gauge that based on the upside opportunity and what we see as the potential and the marketplace that the store is in.

Vincent Sinisi -- Morgan Stanley -- Analyst

Gotcha. All right. Very helpful, Gary. Thank you, guys. Good luck.

Gary M. Philbin -- President and Chief Executive Officer

Thank you.

Operator

We'll take our next question from Matthew Boss with J.P. Morgan.

Matthew Boss -- J.P. Morgan -- Analyst

Thanks. I guess at Family Dollar, if we think higher level, so flat comps for the quarter. Same-store sales turned back negative in July. I guess when you break down the components, is it traffic that's the missing ingredient here? Do you foresee any need to take pricing actions to accelerate footsteps? I guess how best to think about the potential game plan and any changes that you're considering?

Gary M. Philbin -- President and Chief Executive Officer

Well, it is traffic during the quarter. We actually had a pretty nice basket increase that offset that. But we obviously have to do both. So, the focus on driving traffic then comes down to some of the things we've mentioned. Consistency of stores. But I sort of come back to how we look at the group of 8,000 stores across the portfolio, Matt. The stores that do fine, we want to make sure they're amped up on the right store investment that we've talked about on labor. For the stores in the middle, we want to make sure that we have targeted operational plans to make sure we get them up to brand standard, as always. We can do things specifically at the store level.

Your comment on where we are on pricing, I would tell you our pricing shows us in the targeted areas we want to be against our major competitors. It doesn't mean every once in a while you've got to go and find the right thing for a Family Dollar customer around first of the month and end of the month to drive that traffic. Those are sort of the arrows in our quiver that we can use on a monthly basis. Over the long range, I want to affect more stores. They have customers come in the door because they know they have that renovated store the right way. So, our top volume stores, to me, I think about it as an investment in the things we've talked about, investment in store labor, investment in wages.

In the middle, they'll get some of that, but clearly we get more renovation lift from some of those stores. As always, we'll take a look at the portfolio optimization and figure out what stores, as they come up for lease, shouldn't be part of the herd anymore. But that will be the process that we think about driving traffic in the back half and impacting '19.

Matthew Boss -- J.P. Morgan -- Analyst

Great, that's helpful. Then just one follow-up. What's the embedded gross margin outlook in the full-year guide? I guess maybe even just higher level. Help us think about the headwinds versus tailwinds that you're facing in the back half, maybe at both banners?

Kevin S. Wampler -- Chief Financial Officer

I think, Matt, as think about it, and we've been pretty transparent about the freight headwinds since we gave initial guidance way back in early March. That will continue. I think as you look at it, it has a little bit heavier effect in Q4 than Q3, and that's just really because of the way the goods flow. You're basically bringing in a lot of inventory now that you sell in Q4, which is when the capitalized freight goes with it, basically, so you'll have some of that. So, we know that's going to be there.

Obviously, I do believe diesel becomes a little bit less of a headwind as we go through the year, assuming the price stays steady where it is today. If you look at diesel a year ago for Q2, it was about $2.50. It went to about $2.70 for Q3 and about $2.95 for Q4. So, diesel does trend up as you go up through the back half of last year, so the compare while it will still be a headwind, will not be as big of a headwind as we get to the fourth quarter, assuming current rates stay somewhat steady. That's right around $3.25 right now is where the diesel rate is. So, that's the big one, realistically, that we've seen.

Shrink, again, has been a headwind. Again, it dissipates a little bit as we go to the back half, but it will still be a headwind as well. The good thing is as we talked about on the Dollar Tree side, the mix has been very good. We've had a very balanced cell on consumables and discretionary. When we see that, we tend to like that on our overall margin, when we're able to get those nice comps in our discretionary category. So, a lot of puts and takes.

On the comp basis, as we saw this quarter, we're not able to leverage our Family Dollar overall occupancy cost. We are able to leverage Dollar Tree. So, some puts and takes for each banner. But, again, there will continue to be some pressure as we go through the back half.

Matthew Boss -- J.P. Morgan -- Analyst

That's helpful. Thanks for all the color.

Operator

Our next question comes from Judah Frommer with Credit Suisse.

Judah Frommer -- Credit Suisse -- Analyst

Hi, good morning. Thanks for taking my question. First, maybe given the differences in the Dollar Tree and the Family Dollar banner in terms of how they're shopped to the core customers there, can you help us out with what you're seeing from, I would say, the middle and the low-income consumer? Clearly very good traffic at mass merchants and Dollar Tree probably benefited a bit from that. But any insights into maybe that lower-end consumer would be great.

Gary M. Philbin -- President and Chief Executive Officer

Sure, Judah. Thank you. I would say Dollar Tree, because of the geography and where the store sites are, we've heard other retailers call it out, I think Dollar Tree feeds off that. Our customers are coming in I think with a little more to spend. Basically middle class and above and the opportunity is there to spend a little bit more. We're seeing that both in traffic and basket at Dollar Tree. It just sort of makes sense when we look at the anchors we're next to and we hear them report and we compare that to how we're doing with the same anchors and there's a pretty good correlation there. So, that feels pretty good to us.

I think with the Family Dollar customer, we do serve a needs-based customer. It is different. I think always as we've talked about, we're there to try to provide a solution for a budget from the beginning of the month to the end of the month. Much more consumable driven, which is showing up in the consumables comps we have. I think the stubborn part for us there has been discretionary. In May, we were really encouraged. Obviously, spring/early summer got off to a late start because weather in Q1 that everyone had talked about. In May, we really saw it pop up. I think it was a couple of things. Clearly, people were probably behind on warm weather purchases at that point.

But I think it also spoke to Family Dollar because sales were delayed, every store had their best assortment right there at the beginning of May. The comps we saw at that point across discretionary I think sort of point to when it all gets to the store and it looks as good as we hope or close to it, our customer responds. I think as we went through the summer as assortments break down or we run out of something here or there on our assortments, especially on the discretionary, that's where we lose steam. That's on us. But that's something we can fix. That's something we can control.

But as to the lower income customer, we're very sensitive to it. Utility bills have been higher this summer because of all the heat across the country and rents, if you take a look at any trend that I do, it still shows rents continuing to go up three years going now. So, that's money out of their pocket. We can do better to get those dollars and appeal to them to buy across our entire store. That's our focus. But I want us always to be sensitive to making sure we have an opening price point for this customer when they come in our store. When they have to spend the extra $20 on a utility bill, we ought to be there to find the solution to make that somehow ease the burden of stretching out their budget for the back half of the month.

Judah Frommer -- Credit Suisse -- Analyst

That's helpful. Then maybe just a quick follow-up. I know we're not talking about synergies much anymore, but as you talk about shipping for both banners out of your new DC, is their supply chain opportunity we can think about as we continue in the integration there? Or is it going to be new DCs will maybe act differently than historical ones?

Kevin S. Wampler -- Chief Financial Officer

I think we've pretty much said from day one that supply chain was a little longer-term project as we think about it from right sizing, rationalizing, getting everything in the right place at the end of the day. Again, you can see the new building in Warrensburg, Missouri has been built such that today it's servicing Dollar Tree stores, but it could be co-bannered and service both. Again, from an extend mile perspective, it's always going to be beneficial. I think there's things we continue to look at in supply chain. Automation is one of those. How do you use automation to bring your overall -- what we really look at is cost-per-case. How much is it costing us to move a case through the distribution network at the end of the day? So, there are opportunities, things that we're working on and looking at. We really should have an opportunity to continue to move forward with some of those as we go forward. It'll be some capital investment to do some of these things, but I think there's the return on it that we believe will make it worthwhile.

Gary M. Philbin -- President and Chief Executive Officer

Judah, I would just add also that capacity issues have really been on the Dollar Tree side. As we rebannered stores, converted deal stores to Dollar Tree. We needed the firepower on the Dollar Tree side. So, that's the other reason that Warrensburg will service Dollar Tree initially.

Judah Frommer -- Credit Suisse -- Analyst

Makes sense, thanks.

Operator

We'll take our next question from Joseph Feldman with Telsey Group.

Joseph Feldman -- Telsey Advisory Group -- Analyst

Good morning, guys. I want to just follow up with you guys on something regarding the tariffs. I know we haven't seen them all implemented yet and there's another $200 billion talked about and the 10% or 25%. But $0.04 for ribbon alone seems like a lot to me. Could you give a little more color around that and kind of what it would look like potentially if at least the current list that's being proposed was implemented?

Gary M. Philbin -- President and Chief Executive Officer

Joseph, just to be clear, I think there's a difference here. What we talked about is the anti-dumping duty, which was a specific ruling by the Commerce Department against ribbon from China. They had a dumping duty of 380%. That's 380%. It was ruled on August 3rd or 8th, somewhere in that timeline. Orders for the holidays had already been written 6 months before and on flights and on boats and on trucks. That's completely different than the tariff piece, which is being considered at 10% or 25%. So, don't mix up the two. The dumping duty is a one-company issue on Chinese ribbon. That's what the effect is on the $0.04 based on that 380%. Different than the tariff 301 that's being considered at 10% and 25%. Make sense?

Joseph Feldman -- Telsey Advisory Group -- Analyst

Yeah, that's very helpful. Thanks for clarifying that. Then a quick follow-up, I fully understand the vast number of stores that you guys operate with Family Dollar, and you are accelerating some of the Family Dollar renovations, but how do you accelerate it further, how do you get to 1,000 stores in a year or 2,000 stores even in a year? Because it seems that's one of the gating factors. Is it just a human capital issue? Are there other things maybe that you could streamline to speed that up?

Gary M. Philbin -- President and Chief Executive Officer

I think you're exactly right. The optimization of this group of stores, we can impact more stores than the 500 this year. Everything you just suggested, we're going through budget season now. What's it going to take us to do more and how many more is that? We're not lacking capital. We certainly want a great return for any dollar. We want to be prudent managers of capital. But this is what we've got to do to change the impact for the fleet of stores. We'll overcome all of it. We'll figure out the right stores. We'll figure out how many people we need to put against it. Obviously, it's not the only limiting thing you've got to consider, but you certainly have to plan it. I think you're spot on. How do we do more, that's how we're going to change how we affect our fleet of stores and really how we affect our customers at the end of the day to have them buy more and have more of them come into the store.

Joseph Feldman -- Telsey Advisory Group -- Analyst

That's great. Thank you for that and good luck with this quarter, guys.

Gary M. Philbin -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Robbie Ohmes with Bank of America Merrill Lynch.

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

Good morning. Thanks for taking my questions. Actually, my question is on the Family Dollar gross margin and if you could give us more color on how to think about that for the rest of the year? Down 150 for this quarter and it looked like merchandise cost pressures and freight was the biggest driver of that. Should we be assuming that type of rate decline for the back half? Then also, just looking out over the next couple of years, could you remind us how you're thinking about the gross margin at Family Dollar? Thanks.

Kevin S. Wampler -- Chief Financial Officer

Robbie, as we look to the back half, as I stated earlier, there will continue to be pressure and freight is the biggest pressure item. Less in Q3 than in Q4. And again, that's timing of inventory coming into the system and then when it's sold. But the belief is that the effect will be somewhat less than it was in Q2 as we sit here today. So, that's how we're thinking about it. But there will continue to be pressure and really, the freight is the biggest impact. In Q2, we actually saw our markup was up. We did have a fairly significant shift to consumables in the mix, about 60 basis points more in consumable sales than a year ago. So, overall, we feel pretty good about how we navigated through that. But again, our needs-based customers are liking what they're seeing from a consumables standpoint.

As far as long-term, obviously as we've said, the freight item this year is one of those shock-to-the-system type items that we have deal with and manage through. We'll do that. Obviously, the expectation is we're going to drive the gross profit up as we go forward. That's the way we view it. Obviously, there's a lot of things that have to happen. We can definitely do better in shrink. We're not happy with our shrink performance this year in either banner. So, there's an opportunity there. I think from the standpoint of distribution cost, again, as I mentioned on the earlier question, there's opportunity there. So, there's going to be opportunities. It's just putting that together.

At the end of the day, to Gary's point, driving renovations, driving sales, creating leverage on line items would be helpful as well. I think that's the general thought process.

Gary M. Philbin -- President and Chief Executive Officer

Robbie, I'll just add color. I know you asked about long-term. We're going through a year here where the shrink bogeyman is in the room with us. We're going to get that one licked. Freight is a real thing this year but it's not going to be forever and we're going to find a way to mitigate it until it does get better with the external forces at work. I feel the pain right now. It's not going to be a forever thing. Our discretionary business at Family Dollar is going to be one of the ways we expand margin.

As we do the renovations, that drives margin expansion in the stores. But we still have to get better on that side of the business. It's there to be had for us and the levers that we've talked about on private brands and import are just as true now as when we started out. That's what our teams are working on.

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

Gary, that's helpful. One follow-up question. In the second quarter, if you look at the largest U.S. retailers like Walmart, Target, Costco, some of them put up some of the best traffic comps in a long time. I would love to just get your perspective on where both of your banners fit into an environment like we saw in the second quarter where the traffic really just accelerated, for example, at Walmart.

Gary M. Philbin -- President and Chief Executive Officer

Well, I would say listen, we like a healthy customer. We're in the same arena, especially at Dollar Tree and I think our 2-year stacks at Dollar Tree, we're pretty proud of. I think that speaks to everything that they've been talking about what they see in the health of the customer. I think even if we [inaudible] quarter, we certainly had thoughts if we were going to extend what we saw early on, we'd be having a different conversation now. But we serve a different customer at Family Dollar. We serve a little bit of everyone.

But I go back to it's a customer that's on a different kind of budget than most of us can think about. We get graded every first of the month on do we have the items that she needs then and at the end of the month, do we have the items opening price point oftentimes that allows her to get toward the end of the month. It's not the same rising tide for the customer at Family Dollar. We owe it to ourselves and really to our customers there to make sure what we put in front of them will resonate with them. It's showing up on the consumables side. We like our business there.

We're getting graded pretty well there and we're working real hard on the discretionary things. It's sort of one more purchase that we need at a Family Dollar store to make all the difference in the world. And then do that against a backdrop of consistency, merchandising energy in the store, let's push the heck out of renovations for the balance of this year and next. I think that's the magic sauce we need at Family Dollar.

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

That's very helpful. Thanks, Gary.

Operator

We'll take our final question comes from Dan Wewer with Raymond James.

Dan Wewer -- Raymond James -- Analyst

Thanks. Gary, I think probably on every conference call during the last couple of years and probably most of your investor meetings see the question about pricing, where Family Dollar has come up. It came up again earlier on this call. The company always communicates that pricing is better than it was a few years ago. We have smart ways to save. Better end-caps, etc. But is there a philosophical reason why Family Dollar doesn't adopt a pricing strategy equal to or maybe no more than 3% above Walmart on national branded consumable items?

Gary M. Philbin -- President and Chief Executive Officer

Well, philosophically, Dan, I think we take a look at the major competitors we go against in the market. Obviously, when we're close in the trade area of Walmart, they become one of them. They're not in every market we have. So, we take a look to either win on specific items or match or something that is important to our Family Dollar customer. Based on sales we see flow through the store, we make those judgments. Clearly, what comes through loud and clear from every research we've ever done, and we continue to see, is opening price point at Family Dollar. Sometimes it's a dollar item, but not all the time. Those are the items that we've really got to be right on with our customer. So, those are the elements when we take a look at the baskets that our customer buys, and I still go back to consumables. We have a large number of KBIs, like everyone else, and what we see in our consumable business is driving that comp now for 7 consecutive quarters.

So, I'm not going to put together the pieces of all of our pricing strategy on the phone call today, but I think those are the elements that allow us to drive that kind of a comp on the consumables side. I would add maybe one other piece for our customer. You've heard me talk about it too at every conference. What we do at first of the month and end of the month at Family Dollar are two different things. That's important too for our customer.

How we merchandise, what's in the ad, how we affect them with the Smart Coupons, which continues to grow. I think it's not something we've talked a lot about, but we're always surprised by how many customers have signed up. One, because our customers have just as many smartphones now as the average in the U.S. And No. 2, they see the items offered to them that make the most sense. You've heard me give the examples before on that at conferences.

So, it's not just what's on the shelf. It's that plus what's in the ad, promoted. It's our price drop. It's the Dollar Wow our customer goes through the store with. So, I view it as a recipe we go to market with. Never taking a look at one time, but making sure that our pricing strategy is spot on with how we want to affect our customer base.

Dan Wewer -- Raymond James -- Analyst

Okay. Great. Thank you so much.

Gary M. Philbin -- President and Chief Executive Officer

You're welcome.

Operator

That concludes the question-and-answer session. I would like to turn the call back over to Mr. Randy Guiler for closing remarks.

Randy Guiler -- Vice President, Investor Relations

Thank you for joining us for today's call. Our next quarterly earnings conference call to discuss Q3 results is tentatively scheduled for Thursday, November 29th, 2018. Thank you and have a good day.

Operator

That concludes today's presentation. Thank you for your participation and you may now disconnect.

Duration: 62 minutes

Call participants:

Gary M. Philbin -- President and Chief Executive Officer

Kevin S. Wampler -- Chief Financial Officer

Randy Guiler -- Vice President, Investor Relations

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Vincent Sinisi -- Morgan Stanley -- Analyst

Matthew Boss -- J.P. Morgan -- Analyst

Judah Frommer -- Credit Suisse -- Analyst

Joseph Feldman -- Telsey Advisory Group -- Analyst

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

Dan Wewer -- Raymond James -- Analyst

More DLTR analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.