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Dollar Tree, Inc. (NASDAQ:DLTR)
Q3 2018 Earnings Conference Call
November 29, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to Dollar Tree's third 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, Brandon. Good morning and welcome to our conference call to discuss Dollar Tree's performance for the third 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, 8-K, 10-Q, and annual report, which are on file with the SEC. We have no obligation to update our forward-looking statements and you should not expect us to do so. At the end of our prepared remarks, we will open the call 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 Philbin -- President and Chief Executive Officer

Thank you, Randy and good morning, everyone. Today, we are going to discuss our third quarter performance as well as our plans to improve the consistency of execution across a Family Dollar store base and to optimize our real estate portfolio. This will include a meaningful acceleration of in-store renovations and rebanners in 2019.

This morning, we announced results for the third quarter. Sales increased 4.2% to $5.54 billion. Consolidated same-store sales increased 1%. By segment, comp sales for the Dollar Tree banner increased 2.3%. Family Dollar banner comps were down 40 BIPs compared to last year's Q3 increase of 1.5%. On a two-year stack, basis comps accelerated slightly.

Our enterprise gross margin rate declined 110 basis points to 30.2. Operating income was $387.8 million or 7% and diluted earnings per share increased 16.8% to $1.18 at the high end of our guidance range.

We delivered earnings within the range of our expectations despite continued cost pressures related to domestic freight and our investment in store wages. Dollar Tree delivered its 43rd consecutive quarter of same-store sales growth, with increases in both customer transactions and average ticket.

We are pleased with the performance of our newly renovated Family Dollar stores. Additionally, we have begun the important phase of consolidating our store support centers into our Chesapeake campus, which will improve our ability to support Family Dollar stores through enhanced collaboration, communication, and teamwork.

Dollar Tree continues to have the most unique, differentiated, and defensible business model in US value retail. Customers love our dollar fixed price point, as demonstrated by 43 consecutive quarters of positive comps. Despite periodic cost challenges, the company has continued to deliver a relatively consistent gross margin annually, with sector-leading operating margin. Our 2.3 comp this quarter was on top of a 5.0 comp in last year's third quarter. The comp growth was driven by balanced increases in both transaction count and average ticket.

In our Dollar Tree banner for the quarter, top-performing categories were snacks and beverage, candy, stationary, greeting cards, and our Halloween seasonal assortment. We are extremely pleased with the recent addition of the Hallmark brand to our product assortment at Dollar Tree. Customers are thrilled with the values and the offering and I'll touch more on that in a moment.

Sales performance was driven by strength in discretionary categories. Comps were positive and exceeded 1.5% in all three months. October same-store sales were the strongest month in the quarter and we saw terrific sell-through on our Halloween seasonal merchandise. Geographically, Dollar Tree same-store sales growth was strongest in the West, Southwest, Southeast, and all of our operating zones delivered positive comps.

On last quarter's call, I briefed on our new partnership with Hallmark. We introduced the new Hallmark greeting card program in June. Every Dollar Tree store in the fleet was refixtured and merchandised with a fantastic new assortment. The rollout across the chain was completed one week ahead of schedule and our customer acceptance and feedback has been terrific and was validated by a double-digit comp in our third quarter.

We are able to enhance the assortment by market and store. We have cards tailored to our African American shoppers, our Hispanic shoppers, religious, inspirational card occasions. We have fantastic every day and seasonal assortments with our Heartline brand and our best product of two for a dollar and our Expressions brand for a dollar per card. All our branded with the traditional Hallmark brand and recognizable crown logo. We are enthusiastic about this new partnership with Hallmark and adds to our very important party category.

Also, during the quarter, we added new snack zones into an additional 300 stores. We now have snack zones up and running in more than 800 stores. Store and customer feedback has been terrific and our numbers support this as we like the lift not just from the category but within the store. The concept targets on-the-go customers with immediate consumption items and our stack zone sales are consistently outperforming the budgets assigned to them. These are two examples of how Dollar Tree continues to reinvent our assortment to drive excitement in our stores.

For the Family Dollar banner in the third quarter, since acquiring our Family Dollar brand, our team has made progress toward addressing needed investments, but there's more to be done. While comps for the banner as a whole did not our meet our targets, our renovated stores continued to perform ahead of our expectations.

In fact, in the third quarter, we are seeing the performance of our newly renovated stores are the best performing of our renovation waves of the past six quarters. These strong results give us the confidence that we are poised to see the benefits of our investments in the brand and we continue to focus on the key initiatives that will drive long-term success.

The foundational elements that we have stated from the beginning are investment in customer experience, being better in stocks and assortment, more private brand offerings, along with better buying from our import capability, delivering value through our customers through our smart ways to save, specific customer offers through our smart coupon program, and now most importantly around our efforts to renovate the stores with better adjacencies and impact of our important categories. I'll provide more detail on these efforts later in this call.

Top-performing categories during the quarter include snacks and beverage, refrigerated, frozen products, candy, beauty care, and laundry care. We delivered our eighth consecutive quarter of positive comps in the Family Dollar consumables business. Sales cadence comps were slightly negative in August and September and slightly positive in October. In the prior year, all three months were greater than 1% positive comp. Geographically, Family Dollar's same-store sales growth rate quarters was once again strongest in our West, Mountain West, and Mid-Atlantic zones.

Switching to Dollar Tree Canada, the team, again, delivered mid-single-digit positive comps for the quarter, with increases in both ticket and traffic. The sales growth was balanced as both discretionary and consumables comped at or better than 4% for the quarter. Top-performing categories include harvest, apparel, greeting cards. Importantly, team Canada achieved its operating income for the quarter.

The digital division of Dollar Tree, Dollar Tree Direct, had another productive and profitable quarter in Q3. We experienced comped sales growth and our e-commerce sales are increasingly profitable as we continue to, over time, leverage the existing infrastructure to drive to the bottom line.

Online, we launched a robust marketing campaign to promote Hallmark cards in stores. The campaign included a landing page, a dedicated Hallmark video, and craft ideas featuring our cards.

Now looking at real estate, in the third quarter, we opened a total of 127 new stores, 87 Dollar Trees and 40 Family Dollars. We relocated or expanded 14 stores, 10 Dollar Trees, and four Family Dollars. We renovated 164 Family Dollar stores as a part of our renovation initiative. We rebranded 30 former Family Dollar stores to Dollar Tree stores for a total of 335 projects during the quarter.

We have completed 488 Family Dollar renovations in fiscal 2018, exceeding our original target of 450 for the year. We also added freezers and coolers into 143 Dollar Tree stores during the third quarter, bringing our total of Dollar Tree stores with freezers and coolers to 5,579. During the quarter, we closed 18 stores, six Dollar Trees, and 12 Family Dollars. We ended the quarter with 15,187 stores -- broken out, 6,923 Dollar Trees and 8,264 Family Dollars.

For the full year, we expect to have 325 new Dollar Tree stores and approximately 230 Family Dollar stores. This is below our original plan of 350 Dollar Trees and 300 Family Dollars. The shortfall is due to timing on the Dollar Tree side and our accelerated focus to renovations on the Family Dollar side. We mentioned previously our effort to switch to do more renovations on Family Dollar and by our fiscal year end, that number will be at 500.

Before I turn the call over to Kevin, I'd like to provide an update on the Section 301 tariffs and the potential for additional tariffs. Today, we currently source our products from more than two-dozen countries, which does afford us a degree of flexibility. But I'm extremely proud of the work our merchandising teams, which have been very active, working with our supplier base to minimize our impact from tariffs.

Because of our team's efforts, the expected impact on tariffs to fiscal 2018 will be minimal. As we've always said with visibility and due cost and with some amount of time, we're typically able to navigate and manage a business for ways to offset these costs. Our options negotiating price concessions from vendors, changing product sizes, specifications, and evolving our product mix.

At Family Dollar, we can raise retail, but only as a last resort. Assuming the 10% Section 301 tariff rate will increase to 25% next year, Dollar Tree has already mitigated the potential impact of 2019 tariffs by 80% and Family Dollar by 50%. We have made significant process and will provide additional updates on our fourth quarter call.

Now, I'll turn the call over to Kevin to provide more detail on our third quarter performance and for our outlook for the remainder of fiscal 2018. Kevin?

Kevin Wampler -- Chief Financial Officer

Thank you, Gary and good morning. Total sales for the third quarter grew 4.2% to $5.54 billion. Dollar Tree segment total sales increased 6.3% to $2.85 billion and the Family Dollar segment total sales increased 2% to $2.69 billion. Enterprise same-store sales increased 1%. On a segment basis, same-store sales for the Dollar Tree banner increased 2.3% or 2.2% when adjusted for Canadian currency fluctuations. The Family Dollar banner decreased by 40 basis points.

Overall, gross profit increased by $5.9 million or .4% to $1.67 billion for the third quarter of 2018 compared to the prior year's quarter. As a percent of sales, gross profit margin declined 110 basis points to 30.2% versus 31.3% in the prior year's quarter. Gross profit margin for the Dollar Tree segment was 34.8% for the third quarter, a 30-basis point decline compared with the prior year's third quarter. The decline was primarily due to higher costs related to distributed center payroll and shrink.

Increases in freight were offset by improved mark-on and a positive margin effective for mixed shift based on strong discretionary sales for the quarter. Gross profit margin for the Family Dollar segment was 25.3% for the third quarter, which compared to 27.5% in the comparable prior year period.

The year over year decline was primarily due to merchandise costs, including freight, which increased 60 basis points resulting from higher domestic freight costs. 11 basis points of that increase relates to hurricane-related costs incurred due to our Mariana, Florida DC being down due to the loss of power and storm cleanup. Stores normally serviced by this DC were moved to other DCs in the network for approximately, increasing miles costs.

Markdowns increased 50 basis points related to promotional markdowns. Approximately 10 basis points of the increase was due to damaged inventory in our Mariana DC and multiple Florida-based stores. Shrink costs increased 40 basis points due to unfavorable inventory results and changes in the accrual rate. Distribution costs increased 40 basis points due to higher distribution center payroll-related costs and a change to allocate certain benefit costs related to the DCs to be consistent across banners. This represented 25 basis points of the increase.

Net occupancy costs increased 30 basis points, resulting from the deleveraging effect of the decline in same-store sales. Consolidated selling, general, and administrative expenses as a percentage of net sales in the quarter improved 10 basis points to 23.2% from 23.3% in the same quarter last year. The increase was driven by lower corporate and operating expenses and lower depreciation as a percentage of sales, partially offset by higher payroll costs.

In addition, the third quarter includes $2.3 million of expense related to the store support center consolidation announced September 18th, 2018. Third quarter SG&A expense for the Dollar Tree segment is a percentage of sales improved to 23.2% compared to 23.3% in the prior year's quarter.

Improvement was primarily due to leverage from the increase in same-store sales and lower incentive compensation costs, partially offset by a 20-basis point increase in store hourly payroll expense resulting from the planned tax reinvestment.

SG&A expense for the Family Dollar segment as a percentage of sales was 23.2% compared to 23.4% in the prior year's quarter. The 20-basis point improvement was a result of operating and corporate expenses decreasing approximately 40 basis points resulting from lower advertising expense, legal fees, and a gain on the sale of fixed assets. Depreciation and amortization expense decreased approximately 20 basis points as a result of certain assets that were revalued upon the 2015 acquisition, becoming fully depreciated or amortized.

Payroll expense increased approximately 35 basis points, primarily due to increased store hourly payroll as a result of the planned reinvestment of income tax savings and higher healthcare claims, partially offset by lower incentive compensation expenses.

Operating income for the enterprise was $387.8 million compared with $425.2 million in the same period last year. Operating income margin was 7% compared to 8% in last year's third quarter. Operating income margin for Dollar Tree segment declined 20 basis points to 11.6% when compared to the prior year quarter. Operating income for Family Dollar segment was $55.9 million or 2.1% for the quarter.

Now, on operating expenses for the quarter totaled $47.8 million, which was comprised primarily of net interest expense. Our effective tax rate for the quarter was 17.1% compared to 32.4% in the prior year period. The lower rate is the result of the tax cuts and jobs act, which lowered the federal tax rate to 21% from 35% the prior year. Additionally, the company reported a tax benefit of $15.7 million based on the substantial completion of its analysis on the net-deferred tax liability valuation.

For the third quarter, the company had net income of $281.8 million for $1.18 per diluted share compared to the reported net income of $239.9 million or $1.01 per diluted share in the prior year's quarter.

Looking at the balance sheet, combined cash and cash equivalents at quarter end totaled $708.3 million compared to $1.1 billion at the end of fiscal 2017. Our outstanding debt as of November 3rd, 2018 was approximately $5 billion. Inventory for the Dollar Tree segment at quarter end increased 12% from the same time last year, while selling square footage increased 4.7%. Inventory for selling square foot increased 6.9%. Increase reflects the acceleration and receives certain import goods to minimize the impact of increased tariffs. We believe current inventory levels are appropriate to support our sales initiatives for the fourth quarter.

Inventory for the Family Dollar segment at quarter end increased 7.1% from the same period last year and increased 5.4% on a selling square foot basis. The increased levels in the current year primarily represent our continued work to support in-stock levels at a modest increase in the average unit retail.

Capital expenditures were $228.4 million in the third quarter versus $177.7 million in the third quarter last year. For fiscal 2018, we expect consolidated capital expenditures to be approximately $825 million.

Depreciation and amortization totaled $150.5 million for the third quarter. Depreciation and amortization expense was $149.4 million in the third quarter last year. For fiscal 2018, we expect consolidated depreciation and amortization to be approximately $610 million.

Our updated outlook for fiscal 2018 includes the following assumptions. Calendar considerations include the following -- 2018 is a 52-week year. 2017 was a 53-week year and the 53rd week in Q4 of 2017 added $406.6 million to sales and approximately $0.21 to earnings per share. We've reduced our sales outlook in Q4 due to opening 30 less Dollar Tree stores and 70 less Family Dollar stores than originally planned, as noted earlier by Gary.

Our updated guidance now includes approximately $6 million for expected costs in Q4 related to our store support enter consolidation. We expect continued pressure on store payroll based on competitive markets and states increasing minimum wage. Additionally, as previously discussed, we continue to invest in store hours and average hourly wage rates as part of our $100 million investment into our business from our projected $250 million tax benefit.

We expect higher domestic rates and diesel costs to continue. Net interest expense will be approximately $47 million in Q4. Our guidance does not include expenses and charges in connection with the effects of store optimization, including store renovation, store closures, and other assets.

We cannot predict future currency fluctuations. So, we have not adjusted our guidance for changes and currency rates. Our guidance assumes a tax rate of 21.75% for the fourth quarter and 20.2% for fiscal 2018. Weighted average diluted share counts are soon to be 239.3 million shares for Q4 and 238.9 million shares for the full year.

For the fourth quarter, we are forecasting total sales to range from $6.1 billion to $6.21 billion and diluted earnings per share in the range of $1.86 to $1.95. These estimates are based on a low single-digit same-store sales increase and year over year square footage growth of 3.2%.

For fiscal 2018, we are now forecasting total sales to range between $22.72 billion and $22.83 billion based on a low single-digit same-store sales increase and 3.2% square footage growth. The company now anticipates net income per diluted share for full year 2018 will range between $4.86 and $4.95, compared to the company's previously expected range of $4.85 to $5.05.

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

Gary Philbin -- President and Chief Executive Officer

Thanks, Kevin. Following the completion of the acquisition of Family Dollar in July 2015, we've made significant progress on integration. We've exceeded our initial synergy targets, strengthened our balance sheet, and at the same time laying the groundwork for our future growth.

As part of the integration process, we focus first on building a single infrastructure by implementing initiatives to establish a single foundation to drive performance across the organization and support the growth of both Dollar Tree and Family Dollar brands. As part of this foundational work, we successfully implemented a shared services model across corporate support functions.

We introduced a common system, some processes across both brands. We improved logistic and supply chain efficiencies, including testing and refining the approach and systems for combined distribution centers. Our first combined distribution center is in St. George, Utah, where we began servicing both brands in 2016.

The learnings in this center are paving the way for the launch of our next generation of combined ECs and additional synergies and we commenced the consolidation of corporation functions, including all support functions into our Chesapeake, Virginia headquarters location. We expect to complete the consolidation by fall of 2019. With this foundation in place, Family Dollar's position along with the Dollar Tree brand to benefit from the combined scale of our broad footprint.

But our integration work has not only been focused at the corporate level. During this time, we've implemented initiatives to improve operational performance across the footprint of Family Dollar stores.

Examples of our work, building the leadership team by hiring executives with significant and relevant retail experience, changing restock policies to improve in-stocks, improving adjacencies in merchandising of key impact categories with a focus on consumables and increased refrigeration, introducing programs and training to enhance the sales culture, including at store level compensation programs to better incentivize and align performance.

Launching Smart Ways to Save, our customer-facing marketing program, investing in mobile technology, and introducing smart coupons to better reach core customers and increase store loyalty, commencing a program to improve and rebrand private label product, and increase the variety and quantity of private label products in store, completing a store format test to optimize layout and develop a net prototype design.

As we've discussed in prior calls, we've analytically looked at process to optimize Family Dollar's real estate portfolio through renovating stores, rebannering stores to Dollar Tree brand, or closing stores. Since completing the Family Dollar transaction, we have opened 830 new Family Dollar stores, renovated 865 Family Dollars, rebannered 354 stores from Family Dollar to Dollar Tree and closed 195 Family Dollar stores.

Our renovation program really began 18 months ago and since then, we've continued to take the learnings from each generation of renovations and applied them to the next. You've heard us say our renovations are comping the mid to high-single-digits. That's true when you look at the entire footprint of renovated Family Dollars. However, if you look at the more recent renovations, we're seeing higher comps, which gives us the confidence we're executing well. We're therefore going to be accelerating our store optimization program in 2019. As of now, we expect to renovate a minimum of 1,000 Family Dollar stores in fiscal 2019.

Next year, we plan to open 350 new diabetes stores and 200 new Family Dollar stores as well as rebanner an additional 200 Family Dollar stores to Dollar Tree. Additionally in '19, we'll be expanded snack zones to additional Dollar Tree stores and we expect to be in a position to provide you with additional information on these store-related projects in 2019.

So, in summary, through the hard work we've done in the past three and a half years, we've put in the place the foundational elements that we need to be successful over the long-term and with the acceleration of our program to optimize our plate of stores under the Family Dollar brand, we're going to improve the customer experience across our portfolio and accelerate our growth. We've done a lot of testing and we know what works in both urban and rural markets. Based on that, we think we have a tremendous opportunity ahead of us and across the country. In short, we're more excited about our future than ever.

Let me give a brief update on our capital allocation plans. In connection with the acquisition, we did not make share repurchases in order to allocate sufficient capital to reduce outstanding debt. Invest to support the growth of Dollar Tree and Family Dollar, invest in the initiatives to integrate Family Dollar, and to improve store performance across the portfolio. Since completing the acquisition, we've paid down approximately $3.5 billion in debt. In March, we achieved upgrades to investment grade from S&P Global and Moody's. We have continued to produce strong cash flow from operations.

As a result of our successful progress with integration and free cash flow in excess of investment needs, we expect to pay down our variable rate outstanding debt. The company has an existing $1 billion board authorization to repurchase shares and will continue to evaluate share repurchases in 2019. We plan to provide more information related to our capital allocation strategy in 2019.

In summary, we continue to focus and make meaningful progress to grow and improve our business for both brands. 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 provide 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.

Before I turn the call over to Q&A, I'd just like to make a shout out to our store and field teams, both after the hurricanes and recent fires. Many of our store associates and customers were personally affected by these storms. I wanted to personally and publicly share our thanks to the thousands of associates who work tirelessly to have their stores open and serve their customers in preparation for and then in recovery from the significant weather and fire events.

We saw great teamwork, passion, and dedication throughout the organization. My personal thanks for all the efforts made in our stores, our Mariana distribution center, support center, and our many vendor partners that enabled us to get the impacted stores back up and running through and after these events.

Operator, we're now ready to take questions.

Questions and Answers:

Operator

Thank you. If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you are using a speakerphone, make sure your mute function is turned off to allow your signal to reach our equipment. Please limit yourself to one question and one follow-up question if necessary. Again, press *1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions.

The first question will come from Michael Lasser with UBS. Please go ahead with your question.

Michael Lasser -- UBS -- Analyst

Good morning. Thanks a lot for taking my question. Gary, can you provide more context around your commented you mitigated 80% at Dollar Tree and 20% at Family Dollar of the 25% potential tariff. Does that mean if the tariff goes through, you will see a 20% hit at Dollar Tree and a 50% hit from those two banners or is there more to go? As part of that, how have you been able to mitigate it such that there could be an effect from your customer from lowering product quality, product size, or other factors?

Gary Philbin -- President and Chief Executive Officer

Thank you. Yes. Really, I called out the efforts of both merchandising teams. We're anticipating it's going to go to 25%. The number I'm referencing is we expect the 25%. The mitigation is based on that going through. You've heard us mention how we've done it before. It sounds like it's easy. It's not because we're touching a lot of SKUs. The one thing you mentioned is lower quality. We don't reduce quality. It could be an account size change.

But I would say it's probably been a bigger effort around where else can we buy things besides China, a subtle thing -- how do we make things to have better cube to come across so we can land it on the US side at a better landed cost. It's negotiation with our vendors who also know this is a very important time with the volumes you can put through some of the factories to negotiate that. It's never one thing. It's our efforts to negotiate very well on both sides.

Take a look at the item, what do they have to have, what can they change. What would you modify and how do you pack it? This will be a year we also have to be nimble. While other folks get to raise retails, including our Family Dollar banner, as I've told folks before, our customers often don't have that extra dollar. We've got to be better buyers. That's going to speak to how we buy, the specs we buy to and which countries we go to.

Michael Lasser -- UBS -- Analyst

Is there room to further mitigate the 20% at Dollar Tree and 50% at Family Dollar. As a follow-up, I think theres' a prevailing view in the marketplace that Dollar Tree, the enterprise operating margin is going to continue to be under pressure for next year. I recognize it's early. What would be the offset to these factors that would allow you to keep your operating margin flat or growing.

Gary Philbin -- President and Chief Executive Officer

To the first part on the imports, we're still working hard. We started in earnest in August-September and we've still got things to buy in the back-half of the year. That's really the balance we have to mitigate. We're off to a real good start at both banners, more work to be done. This is going to be a year where w'ere going to have to understand what the customer -- between the tariffs -- we've gone through a year of nothing in my retail history, I'm seeing the lack of truck drivers at impacted freight, but I want to go into next year thinking that we have the right assortment in place for our customers first and drive business. There, we get the chance to leverage some of our fixed costs and other things we've always done to drive up income. As I look into 2019, it's going to be all about stay close to our customer and what do they buy they respond to in both banners.

Michael Lasser -- UBS -- Analyst

Thank you very much.

Operator

The next question will come from John Heinbockel with Guggenheim Securities. Please go ahead.

John Heinbockel -- Guggenheim Securities -- Managing Director

Hey, Gary. What's your broader thought on the Family Dollar store footprint including the possible need for underperforming store closures? Tied to that, when you think about the 1,000 remodels next year plus the openings, your thoughts on the field organization's ability to handle all of that change in one year's time.

Gary Philbin -- President and Chief Executive Officer

Agreed. I think we boldly stepped out there across both banners, but I would stay focused on Family Dollar, a lot of renovations, more than we've done. The reason it's important is what we're seeing in the current renovations. I would tell you the field is excited. Everything we've done to get our folks incented and aligned to run better stores, here's a chance to change the four walls of their stores, we've got to do it one store at a time, but the opportunity to drive more footsteps in these stores and improve topline, I would tell you they're raising their hand, "Give me one of those."

The execution piece -- we've got to be on top of our game. It's a lot because of what you do to enhance a store and reset it and the SKUs that come in and out. It's not a small task for the field team to execute, but we're up for it. This is our opportunity to make meaningful change at Family Dollar. It's how we've described it to our organization. They've seen the ones responding. I walked a store recently with our RD and DM, their eyes light up.

The consistency, execution, we're going to be all over that next year. I want to go through 2019 saying we did at least 1,000 of them and we were pleased with all of them. That's going to be the bar we set going to 2019, along with the rebanner. As we've taken a look at the store in reference to the broader question and we've taken a look at which stores are responding to the renovations and what is an urban versus rural and the stores that are tweeners, you might say that's where we're harvesting some of those to become Dollar Trees.

So, the opportunity to now understand that in a better way and as we continued our innovations and renovations -- the stores that don't respond to that, now, we can sort of see that. The things that we had worked on on table stakes to get all stores to improve, those are good things to work on in retail. I think what we like about the renovations is that's what changes really the course of the future footsteps for that store and sort of breaks out for us. That's our effort for 2019.

John Heinbockel -- Guggenheim Securities -- Managing Director

On the tariff topic, is the mitigation at Family Dollar, is that more a function of FDO does have pricing flexibility where Dollar Tree doesn't? If we did not get the 25% -- we'll assume we do -- but if we do not get it, on the incremental 15%, I assume your gut feel would be to reinvest that into the business, not keep it.

Gary Philbin -- President and Chief Executive Officer

Other people raise retails up or lower them. For us, you have to be close enough to this customer and have the same kind of value. The magic of Dollar Tree only works if they know that's worth more than a dollar because it is somewhere in their shopping universe. Family Dollar, we've always got flexibility.

At Dollar Tree, our promise is to have great value in the store, not necessarily that item. At Family Dollar, there are some basics I want to make sure we're in place with. Our team is still working hard on it. We have our big post-holiday trip. We will do better than where we are today, but at the end of it, we may have to invest some of that to stay in place with the right items as we go into 2019.

I don't think you can just say listen, if the tariff goes to 25%, it's a real thing. Other retailers can be faced with that too and we're going to respond to it in our world the right way to make sure our customers see the right values in both Family Dollar and Dollar Tree.

Operator

Thank you. The next question will come from Peter Keith with Piper Jaffray. Please go ahead.

Peter Keith -- Piper Jaffray -- Analyst

Good morning. I want to go a little more into the renovation initiative into Family Dollar. Gary, last quarter you said you were getting a mid-single-digit comp lift. This quarter, you said the store is performing better. Could you give a sense on what some of the changes were so we can hope to see that continue into 2019?

Gary Philbin -- President and Chief Executive Officer

Exactly. I would say it's not going to be one change. I would say this, Peter, as we went through the last 18 months, you put these stores out there, it's easy to walk into a store, you like the layout. It always comes down to the look and feel. I would tell you it's more around the assortment the customer ultimately sees.

So, our latest iterations have focused on some of the things the customer needs most. You've heard us talk about consumables, very important for Family Dollar. It's a piece of the emphasis. The adjacencies that we've been talking about are paying off worse. Some of the price impact we've been making throughout the store is a piece of it. What we've done is a way that finds us to get the last dollar when she's waiting for our checkouts is as important as anything we've done in the store.

Is it one thing? No. Is it the combination of all those efforts that got us to that? Yes. The final judge for me -- we'll continue to refine. I can't put a thermometer on this and say we're to the boiling point, but I think we're pretty darn close. I would just tell you that it shows up in footsteps into the front door.

Peter Keith -- Piper Jaffray -- Analyst

I did also want to dig into the opportunity for combined supply chain. You've had the St. George, Utah test going on for two years. I can appreciate it's a complicated initiative, but also surprised it's a two-year test. Could you give us a sense on what's taken so long? As we move forward, when can we expect to see this broaden out to more of the DC network?

Gary Philbin -- President and Chief Executive Officer

It is complicated. Thank you for recognizing that. We're past the test stage. We've built our latest DC in Warrensburg, Missouri. Now, with the same systems, ST. George allowed us to shift both banners. The difference in the issue with has been as we rebannered stores from Family Dollar to Dollar Tree, as stores were divested, then rebannered from Family Dollar, all the capacity needs over the last three years have been on the Dollar Tree side. While Warrensburg has the capacity, at this point, we need the capacity of Dollar Tree, at some point Family Dollar will show up there.

So, I think where you're going to see it is the new DCs will get to that ability to shift first. Then as we shift volume to and from in the network, then we'll have the opportunity to go back into some of the locations, probably on the Family Dollar DC side where they have the capacity to shift to Dollar Tree stores. We're working on that. I don't have a timeline to tell the street that that's when it's going to happen. It's still ahead of us, but we are planning for it.

Operator

The next question will come from Dan Wewer with Raymond James. Please go ahead.

Dan Wewer -- Raymond James -- Analyst

Thanks. Kevin, I wanted to ask you about the cost of the renovations and also the time to complete a renovation. Just to confirm -- is the sales lift now exceeding that mid-single-digit rate you had alluded to in the past?

Kevin Wampler -- Chief Financial Officer

Yeah, Dan. From a cost perspective, what we have said is it really ranges from probably $100,000.00 to $150,000.00. The big variable is always going to be the number or amount of refrigerated and cooler units and freezer units we may be putting into that store. That's the biggest variable.

The typical renovation -- it takes us only about two weeks. It's a very coordinated effort, as you can imagine, because there are some pretty significant changes in regard to moving the layout, changing the store front end as well as adding immediate consumption coolers to the front of the store. It's well-coordinated. We feel pretty good about the work we've done to get that down to a pretty simple timeline.

In regards to your question, the mid-single-digit comps, Gary's comment is it's higher. We haven't really said specifically how much higher, but it is definitely higher than mid-single-digits.

Dan Wewer -- Raymond James -- Analyst

During the two weeks to complete the renovation, we have 1,000 of these taking place next year -- could this put additional pressure on your inventory strength accrual?

Kevin Wampler -- Chief Financial Officer

Part of this is, again, you do really have to look at inventory in these stores and some categories might get a little smaller, so there can be some inventory movement, but I would tell you just in general we are not satisfied with where our shrink has been this year in either banner. It has not been a result that we are very proud of.

It's just something that we are working on. Again, it's not something that you would usually see out of us from an execution standpoint. It's on the top of everybody's list out there in the operations, loss prevention, and the whole organization from the standpoint of understanding this is just as important as driving sales out there. So, I don't want to say it's going to put pressure on it because my expectation is we have to do better next year.

Dan Wewer -- Raymond James -- Analyst

Just as a quick follow-up, if you had unlimited resources, both people and capital, how many Family Dollar renovations would you like to ultimately complete?

Gary Philbin -- President and Chief Executive Officer

There would be thousands. Listen, 1,000 is a big number and I said at minimum because I'm obviously hoping for more because that's how I'm thinking about it. From the standpoint of is this a one-year project? No. We will see the results of this larger group of stores helping us as we get into '19 and more and more of them are behind us. I would see us doing a similar number in '20.

Dan Wewer -- Raymond James -- Analyst

Great. Thanks and good luck.

Operator

Thank you. The next question will come from Chuck Grom with Gordon Haskett. Please go ahead.

Chuck Grom -- Gordon Haskett -- Analyst

Thanks. Good morning. Beyond the remodels, Gary, when you think about investments that need to be made, whether it be labor, training, technology, what else needs to get done to right size the banner and how do you think about the operating margin profile of the Family Dollar segment over the next couple of years, with that in mind?

Gary Philbin -- President and Chief Executive Officer

It's one of the reasons we're doing the renovations. As the stores go up in volume, their leverage their four-wall fixed expenses. I think you touched on the investments that are needed. I try to call out some of the big ones that we've done. Technology will continue to migrate to best in breed between the two banners on some of the systems that we need.

We'll continue to invest in our people, especially with unemployment being at near all-time lows. What we've done this year on what we call the Year of Store Manager to drive success store by store to improving our store manager prioritization, how they direct, how they follow-up with people. This is not either-or. We've got to do both.

Over time operating income, we still have our sights set on where we started this journey. We will continue to improve it. I think what I wanted to emphasize today is we need to touch on a meaningful amount of stores to get the consistency toward that trajectory that gets us there. I've called out before the things we've been doing, the blocking and tackling on our table stakes. All good retailers have to do that.

The equation I want to change is to drive more renovations. We'll do the rebanners too. If it's the right market and the right neighborhood, adding a Dollar Tree assortment changes the four-wall cash immediately on that store. What we've seen is customers do figure out eventually that is a Dollar Tree and we see multi-year comps coming from the rebanner segments we've done.

When we find the right store to do that, we do that too. Between those two, you go on a few years, start getting better comps from the suite of renovated stores that start to leverage their fixed expenses. You start to see rebanners that are opportunistic coming out of the Family Dollar fleet and falling into the Dollar Tree four-wall cash model. I think that's how we take a look over the next few years on building the business plan.

Chuck Grom -- Gordon Haskett -- Analyst

Just on comp variability across the Family Dollar banner, I'm just wondering how wide is the performance on your stores? Is there a thought to close more stores in the coming years on some of the stores potentially underperforming the chain?

Gary Philbin -- President and Chief Executive Officer

I think that's the work we've really been doing on the store optimization, taking a look at we've got good stores, great stores at Family Dollar. You've got some that aren't where you want. How do we fix them? As we've done the renovations, with the new assortment and everything we've talked about.

There's an answer. Some don't see to respond the same way. Maybe those should be rebanners. Some are just operational improvement. We need to get, as always, the right team, the right effort from our operations. On those that can't respond, they might be too old, too small. We're dealing with a big and older fleet of stores. At some point, you close them, at least then, you're being opportunistic.

Chuck Grom -- Gordon Haskett -- Analyst

Thanks very much.

Operator

We have time for a couple more questions. Please limit yourself to one question and one follow-up. The next question will come from Matthew Boss with J.P. Morgan. Please go ahead.

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

Thanks. On the margin front, how are you thinking about freight and markdowns at both banners in the fourth quarter. Larger picture, do you see the opportunity to drive positive consolidated operating margin as you put together all the headwinds and tailwinds you see today on the horizon?

Gary Philbin -- President and Chief Executive Officer

Yeah, Matt. As we speak to freight, we look at that as a continued headwind as we look at the fourth quarter. Diesel, while it's still up, in Q3, it was up 20% as a rate year over year. With the recent pullback in oil prices, that may dissipate a little bit in Q4. That may come down a little bit. Freight in general, I think with the driver shortage and the pressure we're seeing from that, we expect freight to continue to be up and really through the first half of next year, there could be some pressure as well.

From a markdown perspective, it's really pretty much a non-event in the green banner because there aren't that many markdowns. The Family Dollar business is a little different from a markdown perspective. As we noted in Q3, markdowns were up partially to drive sales and again, to make sure we're moving through inventory appropriately.

As we look at Q4, I would expect markdowns in the Family Dollar business to be up year over year. Again, the opportunity to be aggressive when appropriate and to keep our inventory as clean as we can is important. That's there for us. I think as we continue to push that business forward, that's something we need to continue to look at.

In regard to 2019, obviously, we haven't given any guidance at this point and we're finishing up the planning and budgeting as it relates to 2019. There's not really much I can say at this point in time. It's always our expectation that we move the business forward and improve the business and that's what's going to be our guiding principle as we go into 2019.

Operator

The next question will come from Greg Melich with MoffettNathanson. Please go ahead.

Greg Melich -- MoffettNathanson -- Analyst

Thanks. I wanted to follow-up on tariffs a little bit. Thanks for explaining how we're really working to mitigate it. Remind me, how much of your COGS, if you disclosed or not already, are on the current list? I think we had about 25% of COGS coming from China, but I don't think that was the current list.

Gary Philbin -- President and Chief Executive Officer

Tariff-wise, I think we've declared about 9% of our sales are tariffed at this point.

Greg Melich -- MoffettNathanson -- Analyst

So, if that extended, that might be different. But you were saying was mitigating 50% or 80% of what's currently on the list.

Gary Philbin -- President and Chief Executive Officer

That's right, the Tariff 301 list.

Greg Melich -- MoffettNathanson -- Analyst

Got it. A follow-up from before -- you mentioned getting the $100 million reinvestment of the $250 million tax savings. How should we be thinking about that? Is there any left? Do we repeat part of that investment next year? Remind me of the timing of that. Was that all an investment this year or was some of that $250 million going to be in the following years?

Gary Philbin -- President and Chief Executive Officer

The 250, that's the 2018 benefit with us reinvesting $100 million into labor, both in rate and hours. That's not only stores but that's also within our DC environment as well. So, that will continue through Q4. I think as we look into 2019, my very early read would tell you there's likely to still be some general pressure on wages from competitive marketplaces as well as some states continuing to increase their state-mandated minimum wages. I think the $100 million was related only to 2018.

Greg Melich -- MoffettNathanson -- Analyst

Thanks. Good luck, guys.

Operator

Thank you. The final question will come from Robbie Ohmes with Bank of America. Please go ahead.

Maureen Sullivan -- Bank of America Merrill Lynch -- Managing Director

Hi, this is Maureen Sullivan on for Robbie Ohmes. Thanks for squeezing me. I wanted to see if you could comment on traffic trends at the Family Dollar banner and how they've trended in the third quarter and quarter to date and whether we should be expecting a positive comp inflection of Family Dollar in the fourth quarter and what would be the drivers. Thank you.

Gary Philbin -- President and Chief Executive Officer

We'll go against, I believe, a one comp last fourth quarter. Here we are starting off the holiday season. To me, the kickoff is a little bit of Thanksgiving but probably more for our customers the first week of December. All of our plans, all of our efforts, the alignment of getting the merchandise to the right stores, that's going to be the proof in the pudding over the next few weeks. We call it a big spike in our business as we march toward December 25th.

So, we're going to work hard. We're excited about the holiday season. I think we've got our folks in the right place. We spent a lot of time in both of our field meetings back in August to get them prepped on the excitement of the items we have in our stores. We've gotten it to not just stores, but on display. I think both banners going into this year have done a job to improve the holiday assortment.

Right now, we're sort of in the, you might say, trim a home and trim a tree segments. Trim a gift and gift-giving is still ahead of us. Those are clearly the biggest categories. For Family Dollar, it will be, I think, an opportunity for us to really shout on toys with the void in the market. We did lean into the toy business this year. I think that's going to be an important part of us having a positive comp as we go through December.

Maureen Sullivan -- Bank of America Merrill Lynch -- Managing Director

Thank you very much.

Operator

Thank you. I'll now turn the conference back over to Mr. Randy Guiler for closing remarks.

Randy Guiler -- Vice President of Investor Relations

Thank you, Brandon. Thank you for joining us on today's call and especially for your continued interest in Dollar Tree and Family Dollar. Our next quarterly earnings conference call is to discuss fourth quarter and fiscal 2018 results. That call is tentatively scheduled for Wednesday, March 6th, 2019. Thank you and have a good day.

Operator

Thank you. Ladies and gentlemen, this concludes today's event. You may now disconnect your lines.

Duration: 62 minutes

Call participants:

Randy Guiler -- Vice President of Investor Relations

Gary Philbin -- President and Chief Executive Officer

Kevin Wampler -- Chief Financial Officer

Michael Lasser -- UBS -- Analyst

John Heinbockel -- Guggenheim Securities -- Managing Director

Peter Keith -- Piper Jaffray -- Analyst

Dan Wewer -- Raymond James -- Analyst

Chuck Grom -- Gordon Haskett -- Analyst

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

Greg Melich -- MoffettNathanson -- Analyst

Maureen Sullivan -- Bank of America Merrill Lynch -- Managing Director

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