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Dollar Tree Inc (NASDAQ:DLTR)
Q2 2019 Earnings Call
Aug 29, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Dollar Tree Inc's Second Quarter Earnings Conference Call. Today's conference 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 of Investor Relations

Thank you, Casey. Good morning and welcome to our conference call to discuss Dollar Tree's performance for the second fiscal quarter of 2019. Participating on today's call will be our President and CEO, Gary Philbin; Family Dollar President, Duncan Mac Naughton; 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 the most recent press release, most recent 8-K, 10-Q and Annual Report, which are on file with the SEC. We have no obligation to update our forward-looking statements and you should not expect us to do so.

At the end of our prepared remarks, we will open the call to your questions. Please limit your questions to one and one follow-up if necessary.

Now I'll turn the call over to Gary Philbin, Dollar Tree's President and Chief Executive Officer.

Gary M. Philbin -- President and Chief Executive Officer

Thanks, Randy. Good morning, everyone. As we reported today, the turnaround of the Family Dollar business continues to gain momentum. Family Dollar's same-store sales increase of 2.4% was the third consecutive quarter of sequential acceleration and represented a 160 basis point improvement in the two years stacked comp and despite sales headwinds created by the global helium shortage, Dollar Tree segment delivered a same-store sales increase of 2.4% while cycling a strong 3.7% increase from the prior year's quarter. Dollar Tree has now delivered 46 consecutive quarters of positive same-store sales and eight consecutive quarters of two year stacked comps exceeding 6%.

I'm proud of the team's accomplishments. During the quarter, we successfully consolidated our store support centers and as planned closed around 96 Family Dollar stores as part of the store optimization efforts. Additionally, we completed 542 Family Dollar renovations.

Into the H2 format. Our results for the second quarter included a sales increase of 3.9% to $5.74 billion, consolidated same-store sales increased 2.4%. Our GAAP EPS of $0.76 exceeded our $0.64 to $0.73 per share guidance range. Other highlights for the quarter included completing 542 Family Dollar H2 renovations, completing 275 Dollar Tree's snack zones, repurchasing $88.4 million of shares during the quarter as part of our share buyback program. At the end of July, we formally moved all business to the Chesapeake, Virginia campus. This represented the work over the past year to bring all functions and especially our merchant teams together. While we still have associates in the moving process, we now have one physical location to conduct our business.

Regarding Dollar Tree sales highlights for the second quarter, Dollar Tree had increases in both traffic and ticket with traffic slightly outpacing the ticket increase. Geographically, all regions comped positively. Cadence of comps through the quarter all three months were better than 1.5% with June being the strongest month. Dollar Tree continues to deliver solid positive comps in the consumables category. Our discretionary business also comp positive, but it was impacted by the global helium shortage. We estimated that our comp was negatively impacted from latex balloon sales by approximately 40 basis points. We expect this helium shortage headwind to continue, but to a lesser degree in the back half of the year. The first half is more impacted with the timing of our biggest balloon holidays, Valentine's Day, Mother's and Father's Day as well as school graduations.

For real estate in the second quarter for both segments, we opened a total of 150 new stores, 107 Dollar Tree's, 43 Family Dollars. We relocated or expanded 17 Dollar Tree and two Family Dollar Stores. We renovated 542 Family Dollar stores as part of our H2 renovation initiative and we rebranded 106 Family Dollars to Dollar Tree stores for a total of 817 projects during the quarter. We also added freezers and coolers into 210 Dollar Tree stores during the second quarter, bringing our total of Dollar Tree stores with freezers and coolers to 5,970. During the quarter, we closed 305 stores, nine Dollar Tree's consistent with our previously announced efforts to optimize the real estate portfolio 296 Family Dollar Stores. We ended the quarter with 15,115 stores, 7,306 Dollar Tree stores and 7,809 Family Dollar.

Last week we opened up our 24th US distribution center located in Morrow County, Ohio, on-time, on-budget. The 1.2 million square foot facility is creating approximately 400 jobs in Central Ohio and will initially be serving Dollar Tree stores. It is equipped with the necessary systems to serve both Dollar Tree and Family Dollar segments in the future. I will call-out the partnership and support we received from the State of Ohio, Morrow County and the surrounding communities has been just outstanding.

Before I turn the call over to Duncan to discuss the Family Dollar business, I'd like to provide you all an update on tariffs. We have been operating in unique times to say the least as it relates to tariffs. As I stated one quarter ago, our merchandising teams have done an outstanding job of mitigating the effects of 25% tariffs imposed under Section 301 for Chinese goods, included on lists one, two and three, prior to the recent USTR announcements on List 4 as well as the additional 5% tariff increase on all those, we believe our team has successfully mitigated most of the adverse effects of the Section 301 tariffs. We've negotiated price concessions, cancelled orders modified specs, evolved product mix and diversified vendors. We are now taking actions to mitigate the recently announced tariff increases and will continue to assess the future impact of those tariffs. Our merchandising team is experienced, committed, and talented. We have developed and tested and proven process for mitigating cost and have the metrics in place to track and measure success. The team will continue to focus on delivering great value to our customers while managing and protecting margins.

I'll now turn the call over to Duncan.

Duncan Mac Naughton -- President and Chief Operating Officer of Family Dollar

Thank you, Gary, and good morning everyone. Before I discuss family Dollars performance, I'd like to share details regarding a significant organizational milestone that we recently achieved. Effective July 22nd, we have successfully consolidated our store support centers into Chesapeake, Virginia. This was a large complex task that required effective communication, collaboration and teamwork throughout the organization. I'm proud of our team's attitude, commitment and determination throughout this process. Many of our associates stepped up to relocate with the operation and are now settling into Southeast Virginia area. I'd also like to salute and recognize those who could not or chose not to relocate, but they stayed on through July to facilitate a smooth transition. The benefits of having our brands together in one location are simply immeasurable. The Family Dollar team is already seeing the benefits from the stability of having a clear vision of the direction and future of our company.

The Family Dollar team delivered another quarter of sequential improvement in comps with a 2.4% increase. The team's performance demonstrates that our efforts to improve the consistency of execution across our stores and our efforts to optimize the real estate portfolio are working and gaining traction. We continue to believe that we're making the right steps to transform our customer experience to increase the frequency of their visits. Regarding Family Dollar sales, hot sales highlights for the second quarter, an increase in average ticket drove the same-store sales increase in the quarter as year-over-year transaction count was essentially flat. Our consumable business performed very well, delivering its 11th consecutive quarter of positive same-store sales. Regarding the cadence of comps during the quarter, May was up against the strongest compared from a year ago and was slightly positive and June and July with the strongest months of the quarter and notably, year-over-year traffic turned positive.

From a regional perspective, comps for all seven zones were better than 1% with the strongest performance in the West, Southeast and Southwest. A few weeks ago, we conducted Family Dollars Annual Leadership Conference. This conference brings together our field leadership team and business leaders to teach, to learn, to network and strategize as we prepare for the very important holiday season. The field leadership teams they are energized and focus and they will take that energy back to their respective store teams. Theme of our 2019 meeting was the road to reinvention. We must evolve to be prepared for the future and we're making smart changes and bold changes in our business at Family Dollar.

As demonstrated by three consecutive quarters of improved comps, our customers are giving us credit for the improvements they're seeing in our stores, which include our H2 renovations, which continue to deliver low double digit lift and our grand reopening events are effectively getting the word out to the local communities. Key components of the H2 renovations are $1 Dollar stores or $1 wild [Phonetic] sections throughout the whole store, more freezer and cooler doors with a broader selection of products. New signage, new decor with improved queuing lines at checkout, better lighting and much, much more.

Our category resets are working. We're seeing material comp lifts post reset. Examples of our reset success include, candy, household products and food storage. I'm very proud of the work the teams have done in our private brand offerings with improved labels and packaging. These national brand equivalent value-priced products represent an opportunity to deliver great values to our customers while driving customer loyalty, store traffic and profit dollars. At Family Dollar, we are on the road to reinvention. The team has delivered positive comps of 1.4%, 1.9% and 2.4% over the past three quarters and I am pleased with the additional trends for the third quarter.

We have the headquarter move behind us. We have an eager, energized and aligned leadership team and a terrific plan entering the holiday season. I look forward to providing you more updates on our progress in the quarters ahead.

I will now turn to Kevin to provide more detail on our second quarter performance and our updated outlook for 2019.

Kevin S. Wampler -- Chief Financial Officer

Thanks Duncan and good morning. Total sales for the second quarter increased 3.9% to $5.74 billion, comprised of $2.96 billion at Dollar Tree and $2.78 billion at Family Dollar. Enterprise same-store sales increased 2.4% and on a segment basis, same store sales for both Dollar Tree and Family Dollar increased 2.4%.

Overall, gross profit was $1.65 billion compared to $1.66 billion in the prior year's quarter. As a percent of sales, gross margin was 28.7% compared to 30.1% in Q2 of 2018. Gross profit margin for the Dollar Tree segment decreased 70 basis points to 33.8% when compared to the prior year quarter. Factors impacting the segments gross margin performance for the quarter included merchandise cost including freight increased approximately 55 basis points, primarily due to higher domestic outbound freight costs and increase in the mix of lower margin consumable sold. Distribution costs increased approximately 10 basis points due to higher payroll costs and occupancy costs increased approximately 5 basis points on the lower comp compared to the prior year.

Gross profit margin for the Family Dollar segment was 23.3% during the second quarter compared to 25.7% in the comparable prior year period. The year-over-year decline was due to the following; markdown expense increased approximately 100 basis points resulting from store closure, rebanner and renovation markdowns as anticipated as part of our store optimization process. Merchandise cost including freight increased approximately 95 basis points, primarily due to increased sales of lower margin consumable merchandise and slightly higher freight costs and shrink increased approximately 45 basis points resulting from unfavorable fiscal inventory results in the current quarter and from changes to the accrual rate.

Consolidated selling, general and administrative expenses as a percent of net sales in the quarter increased 80 basis points to 24% from 23.2% in the same quarter last year. For the second quarter, the SG&A rate for the Dollar Tree segment as a percentage of sales improved to 22.5% compared to 22.6% for the second quarter of 2018. The improvement was due to the following; store operating costs were lower by approximately 15 basis points due to lower utility cost, specifically electricity resulting primarily from the benefit of the LED lighting program in the stores. Payroll costs increased approximately 10 basis points, primarily due to an increase in store hourly payroll due to higher average hourly rate, partially offset by lower retirement plan expenses.

SG&A expenses for the Family Dollar segment were 22.7% as a percentage of sales in the second quarter compared to 21.6% for the same period last year. The increase in SG&A as a percentage of sales was due to the net of the following. Operating and corporate expenses increased approximately 95 basis points resulting primarily from the loss on disposal of fixed assets due to the store closure, write-offs and stores supplies expense to support the H2 initiative. Payroll expenses increased approximately 35 basis points, primarily due to average hourly rate increases and additional hours including temporary health expense to support H2 renovations and depreciation and amortization expense decreased approximately 15 basis points as a result of certain assets becoming fully depreciated or amortized. Corporate and support expenses increased 30 basis points as a result of $10.8 million of store support center consolidation costs and higher depreciation.

On a consolidated basis, operating income was $268.9 million compared with $382.5 million in the same period last year. Operating income margin was 4.7% of sales compared to 6.9% of sales in last year's second quarter. Non-operating expenses for the quarter totaled $40.5 million, which was comprised primarily of net interest expense.

Our effective tax rate for the quarter was 21.1% compared to 18.9% in the prior year's second quarter. The quarter and prior year's quarter benefited by $5.8 million and $8.1 million respectively for a reduction in the reserve for uncertain tax positions resulting from statute expirations. For the second quarter, the company had net income of $180.3 million or $0.76 per diluted share. This compared to net income of $273.9 million or $1.15 per diluted share in the prior year's quarter.

Combined cash and cash equivalents at quarter-end totaled $623.4 million compared to $422.1 million at the end of the fiscal 2018. Our outstanding debt as of August 3rd 2019 was $4.3 billion. During the second quarter, we invested $88.4 million in the repurchase of approximately 882,000 shares. At quarter-end, we had $812 million remaining in our share repurchase authorization. We'll provide updates on additional share repurchases if any, following the quarter in which they occur.

Inventory for the Dollar Tree segment at quarter-end increased 15.1% from the same time last year while selling square footage increased 7.1%. Inventory per selling square foot increased 7.4%. Our inventory levels reflect the early receipt of imports to mitigate tariffs. We believe that current inventory levels are appropriate to support the scheduled new store openings, rebanners and our sales initiatives for the back half of the year. Inventory for the Family Dollar segment at quarter-end decreased 2.3% from the same period last year and increased 3% on a selling square foot basis.

Capital expenditures were $293.3 million in the second quarter versus $213.4 million in the second quarter of last year. For fiscal 2019, we're planning for consolidated capital expenditures to be approximately $1 billion, which is consistent with our initial 2019 outlook. Depreciation and amortization totaled $155.1 million for the second quarter and $152.5 million in the second quarter of last year and for fiscal 2019, we expect consolidated depreciation and amortization to range from $630 million to $640 million.

Our updated outlook for fiscal 2019 includes the following assumptions. Calendar considerations for the remainder of the include the following. There will be six fewer selling days between Thanksgiving and Christmas, which will negatively impact Q4 sales. With regard to tariffs and the recent USTR announcement, we estimate that without mitigation List 4A and the additional 5% tariffs on List, 1, 2 and 3 would cost the Company approximately $26 million in a additional tariffs. Our updated outlook does not include the recently announced tariff increases as we are currently working to mitigate these costs. Our company outlook on March 6th of 2019 included $95 million in discrete costs related to our Family Dollar store optimization initiative and our store support center consolidation. With the increased visibility of our overall cost, we now expect them for $85 million in discrete costs for the year of which we have incurred $76 million in the first half of the year. Our Q3 outlook includes the remaining estimated $9 million in costs related to these initiatives.

We expect continued pressure on store payroll based on competitive markets, state increasing minimum wage and completing the company's initiatives plans. We expect year-over-year domestic freight costs as a percentage of sales to flatten out in the second half or import freight rates as we noted in last quarter's call will increase in the back half of the year. That interest expense will be approximately $41.1 million in Q3 and approximately $162.7 million for fiscal 2019. We cannot predict future currency fluctuations. So we have not adjusted our outlook for currency rate changes and as always, our outlook assumes no additional share repurchases. Our outlook assumes a tax rate of 22.4% for the third quarter and 22.1% for fiscal 2019.

Weighted average diluted share counts are assumed to be 237.5 million shares for Q3 and 237.6 million shares for the full year. For the third quarter, we are forecasting total sales to range from $5.66 billion despite $5.77 and diluted earnings per share in the range of $1.07 to $1.16. These estimates are based on a low single-digit increase in same-store sales and include approximately $9 million of discrete costs. For fiscal 2019, we are now forecasting total sales to range between $23.57 billion and $23.79 billion based on a low-single digit same store sales increase and approximately 1.3% square footage growth. The company anticipates GAAP net income per diluted share for full year fiscal 2019 will range between $4.90 and $5.11, which includes discrete costs of $85 million or $0.28 per share and approximately $15 million or $0.05 per diluted share in store closure-related costs.

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

Gary M. Philbin -- President and Chief Executive Officer

Thank you, Kevin. I will share a brief update on our early reads from the Dollar Tree Plus! test. We are in the very early stages of our multi-price point test as like Dollar Tree stores and we'll continue to closely monitor the results, Including impacts to traffic, sales and margins. Form details related to test are launched in mid-May. By the end of June, we had the test brought down to approximately 115 stores. The test includes newly added products at price points of $2, $3, $4 and $5. The product is being tested, which currently include about 200 SKUs are clearly identified as Dollar Tree Plus! items providing customers more choices, more sizes, more savings. We're testing our cross-section of high moderate and low-volume stores as well as urban, suburban and rural settings, so we can understand how our customers respond in the varying markets.

Early in the test the product mix has been more toward consumables and this will evolve as we move toward the holiday season with more discretionary items add to the test. We've received feedback on the values from our customers on the initial merchandise assortment and this is critical as we know we want to protect the Dollar Tree brand. Our customers view Dollar Tree as the destination for a terrific value for what you spend in $1. We are pleased with how our teams have started and implement the test across various geographies to our volumes and size. It's giving us valuable insight to our customers view these values across a $1 Tree store. Our teams are excited about the evolution of the merchandise assortment as we approach the holiday season. On our most recent important trip, we have bought specifically for Dollar Tree Plus! stores, I think and excited about the additional assortment that will resonate with our customers as we go into our holidays.

Finally, I want to share a few words regarding our field leadership meetings that I attended in the past few weeks for both Family Dollar and Dollar Tree. This is the opportunity to connect with field leaders face-to-face, teach and learn, recognize, reward all those individuals and teams for performance and service awards. We interact with buyers and sellers, the merchants and our field team work together, we coach and mentor, people development and ensure that we are all aligned heading into the important holiday season. We had very productive meetings and I'm pleased with the focus and business acumen of our business men and women that are leading our field organizations. Our leaders are energetic focused and motivated going into this important back half.

Operator, we're now ready to take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We will take our first question with Simeon Gutman with Morgan Stanley.

Simeon Gutman -- Morgan Stanley -- Analyst

Thanks. Good morning everyone. I wanted to ask about some of the improvement in the Family Dollar comp. To what extent you can tie it to initiatives versus underperforming stores coming out of the comp base versus macro strength and do you think that we've turned the corner here on a higher run rate, I mean it's been a few quarters now of improved sales?

Duncan Mac Naughton -- President and Chief Operating Officer of Family Dollar

Yeah, good morning, and thanks. I'd say we're pretty excited about the 2.4% comp at Family Dollar and what's most exciting to your question is all boats are rising. We're seeing great performance in our H2 stores, but to me what we're seeing is the bulk of the stores are also driving great comp sales. And as I talked about in my prepared remarks, we're now seeing positive traffic across the chain. So that's telling us our customers liking what we're doing as we clean up our stores. As you know, we have roughly 1,000 H2 stores out there and we closed the quarter with [Indecipherable]. So the good news here is we have multi-years to add as we're going to talk about 1,150 or so stores this year and how do we could really change the face of our chain. So I would tell you that we can't with that small store base, we can't run the whole comp. So we're seeing the balance of the chain really help there. We did have some help from store closures, but it was not nearly as impactful as the balance of the chain.

Simeon Gutman -- Morgan Stanley -- Analyst

And then the follow-up I guess on margin and the visibility. At what point does the margin improve and sort of follow this top line and related to it, can you just share with us on the Dollar Tree side how much helium may have heard the GM and maybe the EBIT for the Dollar Tree business this quarter?

Kevin S. Wampler -- Chief Financial Officer

So as we look at the margin, as we look to the back half, obviously the front half in particular was loaded with the discrete costs as we said, we've incurred about $76 million of what we now believe it is $85 million of cost that we will incur. We look for the gross margins to become much more comparable to last year. It's obviously been down. I think the one thing that we have to always consider as we've been driving our business in the Family Dollar world of consumables and even in Q2 the Dollar Tree business was driven by consumables based upon what everything we have going on, touching all these stores that we're touching. So we're driving traffic, we're getting our core customer back into the store and Family Dollar and they're liking what they're seeing, it's a little bit more consumable driven. So our job that we still have ahead of us is to continue to improve our discretionary business. We do look for the gross margin on the kind of dollar side to start to level out as we go through the back half.

Gary M. Philbin -- President and Chief Executive Officer

So this is Gary. Let me add my color to that. For both banners, I think it's important as we went into this year knowing all the stores are going to be torn up for renovations. Page two at Family Dollar stack zones at Dollar Tree, by the time we are going to get to Q2, we will have touched a 1,000 plus stores and designed not exactly reading the crystal-ball as well as you'd like [Indecipherable] aggressively close-outs our wild product at the Dollar Tree side, little bit more on consumables side, on the merchandise plan at Family Dollar. So part of that was to make sure we could go through touchy stores, catch on pulling back together and still drive a positive comp.

As far as balloon, the impact there was the impact of 40 bips and that's really just on what we lost on balloon sales in the first half or in the second quarter year-over-year. And obviously first half as I called out is a little more impactful. What we didn't measure was balloon sales usually have a halo effect of everything else in the party department which is obviously one of our highest margin and a very large business and it really drives customers to that store. So we know it's not going to be as impactful because of holidays aren't as big and we'd like to think it's going to get moderately better as we go into '20, but that was probably the best way to measure the balloon impact.

Operator

We'll take our next question from Matthew Boss with JPMorgan.

Matthew Boss -- JPMorgan Chase & Co. -- Analyst

Thanks and nice progress guys. I guess first at Family Dollar, how best to think about sequential same-store sales improvement opportunity in the back half of the year. Maybe what do you see as top drivers of the traffic inflection at your H2 remodels and any color on early 3Q trends would be helpful.

Duncan Mac Naughton -- President and Chief Operating Officer of Family Dollar

I would tell you what, Matt. Thanks for the question. As you can see our engine is growing, our traffic is turning positive and we're driving some real growth with consumables and our job is to convert that discretionary side of the store to enhance our margin throughout the year. We've got a really strong back half plan and a strong holiday plan that we just shared with our leaders at the annual leadership conference and I think year-over-year, you're going to see us continue to strive to grow our comps as we get more H2s on the ground, they mature and what we're seeing in the balances of stores is they are really starting to have higher standards at store level and there. So the stores are getting cleaned up, the customers noticing and they're getting the components to some of the H2 stores while it may not be an H2 store. So we're trying to fast adapt as we learn what are the key winners in key categories and we did some number of research last year that are now is going to start cycling and be helpful to comp in the back half. So I feel pretty good about our business plan with comps as we look forward.

Gary M. Philbin -- President and Chief Executive Officer

Matt, Gary. I would just add, I mean that's part of the energy and why we added more H2s, shut down to our openers has gotten us ahead of the game to this point to get to thousand done by that time we finish up August here Labor Day weekend and we had some more runway. So we're up for another 150 to get done mainly through September a little bit probably into October to give us more H2s on the ground. But to give credit to the Family Dollar team, the consistency of what we're seeing and store or the work we've done on key resets, I think what we see is lifting all boats right now.

Matthew Boss -- JPMorgan Chase & Co. -- Analyst

Great. And then as a follow-up, just to help break down margins, could you help bucket the discrete costs that Family Dollar had between the gross margin and the SG&A, both what you saw in the second quarter. How to think about the back half? And larger picture, what's the best way to think about Family Dollar's fundamental gross margin recapture opportunity that you see from here?

Kevin S. Wampler -- Chief Financial Officer

It's Kevin. As we did in my prepared remarks, I try to give some good color on this. So let's kind of break it down into pieces here if we can. So obviously within the press release we talked about $48 million of discrete costs within the quarter as well as 15 million of store closure costs. Within that, so that's a total of $63 million or about 230 basis points and basically if you take out the $10 million of store consolidation expenses, then you get about $52 million that within the Family Dollar segment. And as we called out within the prepared remarks about 100 -- that's about 190 bips. In that basically broke down really about 100 bips of markdowns, which we talked about. So you're talking about all the store closures, all the renovations all the rebanners everything related around that from that piece.

And then on the SG&A side of it, it's all of the asset write-off for all the store closures and again, we closed 296 stores during the quarter. Supplies for the H2 renovations, as well as labor, temp labor for the H2 renovations as well, so that's a roughly 90, 95 bips. So that's kind of how to bucket ties them, the best way in the big picture way. As far as they go-forward margin, we have huge opportunities. Obviously, it's been a disappointing year from shrink perspective. We have a lot of opportunity going forward. As we talked about last quarter, look forward to start to flatten out in the back half on a comparative basis. Lot of initiatives in process there relating to one, just changes in leadership and structure, really working on our commitment to training and our execution of our policies and procedures, defensive merchandizing initiatives, analytics and again getting our inventory levels down as well will be very, very helpful in that regard. So I think we have a huge opportunity as we go into next year to help our gross margin in that regard.

Duncan Mac Naughton -- President and Chief Operating Officer of Family Dollar

Matt, let me just chime in, because I think just a couple of comments when I think about first off with increased traffic, we can steer this boat and that's what the H2s are doing and what we're starting to see better in rest of the fleet and so, an opportunity somebody comes to the store and sell the compelling merchandise on the discretionary side becomes all the easier. Secondly, I just tell you having everybody in the same building now and the merchant teams on the same floor, vendors now meeting both banners at the same time. I can't tell you how excited I am about that and we are a $25 billion company with a [Indecipherable] the vendor community. We can drive sales and we will be on the shortlist of people to continue to do that. And then finally just continued piece and imports for getting tariffs for a second, if we can, the opportunity to design and create value merchandise that sells for both Family Dollar and Dollar Tree is a big, big impact for us as we look forward.

Operator

[Operator Instructions] We'll take our next question from Chuck Grom with Gordon Haskett.

Chuck Grom -- Gordon Haskett Research Advisors -- Analyst

Okay. Thanks, good morning. Just Duncan, I wonder if you can amplify on the improvement in traffic in the quarter. I guess do you think it's new customers that you're gaining or is it existing customers repeating? And then one for Kevin, just a follow-up on Matt's question, because there's a lot of confusion on the gross margin line and Family Dollar. So maybe if I could ask it from a different way. Just can you just sort of look at the one-time cost both to the street and the store closures. What that was from a basis point impact versus sort of the normal course of business? Are you shrinking any markdown activity? Thanks.

Duncan Mac Naughton -- President and Chief Operating Officer of Family Dollar

Yeah, thanks Chuck. At the Family Dollar traffic, I will tell you that as we talked about low-double digit lifts in our H2 stores, about two-thirds of that is coming from traffic. And so we're seeing transactions go up there and we're seeing a lot of repeat purchases coming. So part of that as we studied the marketplace, we know we're acquiring some new customers from some other folks in the marketplace. So I will tell you that part of it is both our existing customer coming back more often and then getting acquiring new customers that may have been a Family Dollar customer and through our grand reopening of initiative as we communicate back to them, we've got a new Family Dollar for you, why don't you come, check it out and they see what we have to offer and where they may have stop shopping with us they come back to us. So we feel real good about that pattern.

So in the balance of the chain, we are seeing -- I think people are seeing that our store standards have been better and they're seeing that we've been pretty aggressive with our growth in consumables and we're working on the discretionary side of the business as Gary talked about to move that customer over. We've also modified our marketing campaign to have more frequency, so that we can be in the marketplace more often, which I'm excited about, because we've got a gap there before. So that we'll close that gap. So I would tell you that it's in the H2s, it's some new customers, in the rest of the chain, it's both and I think the good news is trips have gone up.

Kevin S. Wampler -- Chief Financial Officer

And Chuck regards to your question relating to the Family Dollar margin, again really three buckets related to the change year-over-year for the quarter and again it was 100 basis points from markdowns related to the initiatives, about 95 basis points related to increased sales of lower margin goods, it as slightly higher freight and then about 45 basis points related to shrink. So it's really kind of the three buckets as we put them in and can best describe for you. So if there's any something beyond that that you're looking for.

Chuck Grom -- Gordon Haskett Research Advisors -- Analyst

That's helpful. I just wanted to get all the information. And then just on the Tree, just maybe unpack for us the difference between the first and the second quarter gross margin performance and I guess how you're thinking about it in the back half of the year? Thanks.

Kevin S. Wampler -- Chief Financial Officer

Yeah, I think if you look at the first quarter gross profit was roughly flat year-over-year versus this quarter and so we were impacted more by freight in this quarter than we were in the first quarter. And again, a little bit of timing, a little bit of what we've got going on, again we did build inventory as well during the quarter with from import standpoint to mitigate tariffs there some effect from that a little bit, but overall, as we look at it, I think the idea of freight was the bigger piece. We do look for that to mitigate a little bit as we go through the back half as we've said. And then the other piece as we called out was really the idea that we did sell. We had a better consumable business in the second quarter and so our sales mix, our margin mix averaged a little lower at the end of the day because of the overall consumable mix. As we go forward I don't know that we -- as I've said, I don't think we necessarily expect to see the same type of pressure that we saw in Q2.

Gary M. Philbin -- President and Chief Executive Officer

Chuck, I would just give you some color I think really the last two years, our seasons have gotten out of the gates very quickly and performed very well. All of this inventory we brought in to beat the tariffs is there. That's the imports. It's higher margin as we kick-off really the fall harvest season as we get past Labor Day. To me, we are set up to take advantage of the Dollar Tree does best and that's getting geared up on the discretionary side of the business. We have invested in consumables to make sure we had the kind of traffic and customer count we needed as we went through all of our snacks zones. Snack zones are delivering what are across the network and now let's shift gears a little bit back to what the best time of the year is for Dollar Tree and that's really September-October on through the Christmas holiday.

Operator

[Operator Instructions] We will take our next question to Judah Frommer with Credit Suisse.

Judah Frommer -- Credit Suisse AG -- Analyst

Thanks for taking my question. First, to circle back to tariffs, it sounds like you've quantified the potential impact from the increase on Lists 1 through 3 and List 4A, but it's not embedded in the 2019 guide. Is the messaging that you do feel you can fully offset that or is the message that you're working to offset and you will update us with the magnitude of offset at some point?

Gary M. Philbin -- President and Chief Executive Officer

Thanks Judah. Yes. Short answer. I mean we're six days from the last change, right. So I mean here is how we've gone through the year, the merchant teams at mitigated List 1 , 2 and 3 as we knew it, then when List 4A, 4B first came out, we had plans on that and actually on our trip to Asia felt very good about where we were on that and then of course the most recent changes make that the call out of our most recent news. While the things we're doing are working pretty darn well. I would say the vendor community is stepping up. We have done things like we've said before. We've really worked hard on changing how we're packing things or the packaging and how many units can we get on containers, so we can land the overall cost lower. We've been able to move I would say modestly $100 million on what some of the buying trips and of China with our strategy of China plus one. I give credit to our merchants. This is about negotiating a vendor at time to make those differences and that's why I went into this call. We see the most -- we want to give you the math to give you some sense of the scale and really that's work we got to do from six days ago, I have confidence in the group that will mitigate it for the balance of the year.

Judah Frommer -- Credit Suisse AG -- Analyst

Okay, great. And Kevin, you were kind enough with Q4 earnings to give us an early read on next year and the earnings growth related to that and I think you've been clear that you guys guide on a GAAP basis, but GAAP earnings have moved around quarter-to-quarter as discrete costs kind of come and go. Is there any directional update you can give us on how you're thinking about that earnings growth trajectory for next year?

Kevin S. Wampler -- Chief Financial Officer

We have an updated the guidance we gave back in March on that subject. Obviously, we are just kicking off our budget season right now as we speak, basically for next year and in the simplest terms, I don't think anything in the in the basis change. I think we have the unknown of tariffs and where they go and what they may do. I don't know that any others have an answer for that at this point in time. We will want to take that into consideration accordingly, but I would tell you the base case, I don't see necessarily a change in our thought process.

Judah Frommer -- Credit Suisse AG -- Analyst

Okay, thanks.

Operator

Your next question is from Joseph Feldman with Telsey Group.

Joseph Feldman -- Telsey Group -- Analyst

Hi, guys. Thanks for taking my question. Wanted to ask with regard to the new front-end that you have at the Family Dollar side of the business. How many stores have that at this point and like how fast can you get that to all the stores?

Duncan Mac Naughton -- President and Chief Operating Officer of Family Dollar

Joe, thanks for the question. This is Duncan. We've got to obviously in all H2 stores and we're putting in all our new stores as well. The key constraints at a store level is kind of the size first and width second and we do have multiple formats of the queuing line, so I will tell you that where we can, we're putting it in, because it is very profitable to the store, not only the single-serve beverages that are there, but then again that front end is quite profitable both on the snack side as well as you've probably noticed, we've been putting discretionary items on there and the team right now is testing another front queuing line that will actually enhance profitability for that front-end and just really fit the needs of our customer I think better. So it's primarily an H2 initiative at this point, it's where we're focused, where we're doing any kind of other renovations. We'll see if that can be accommodated, but it's really the H2 number.

Joseph Feldman -- Telsey Group -- Analyst

Got it, thanks. And then also just a question on the DCs. I know you guys just opened the 24th new DC and and you made a comment that it's set up for both, but you're only going to start with the Dollar Tree. Can you remind us where you're at with how many I guess co-branded DCs that you do have at this point and how many you kind of want to have?

Duncan Mac Naughton -- President and Chief Operating Officer of Family Dollar

Well, we have one DC that is in Utah that distributes to both Family Dollar and Dollar Tree. We now have one, two, three, four additional DCs that have the internal workings and warehouse management system that allows us to deliver to both. We've needed the capacity for the Dollar Tree banner, because we have capacity in the Family Dollar network because of their closures the rebanners and of course that's putting pressure on the Dollar Tree banner. So ultimately it comes down to the size of the building a new building that we've done that comes out now with the ability to deliver either banner, which will be a place that we moved to and that's a stem mile opportunity for us in the out years. It's right now a function of capacity needed for Dollar Tree banner to make sure we can service those stores and we pick up obviously some stem miles every time we open-up our Dollar Tree banner because we have more stores closer to that.

Operator

Our next question comes from John Heinbockel with Guggenheim Securities.

John Heinbockel -- Guggenheim Securities -- Analyst

So two quick things. I know there is not a lot of H2s with the lengthy history, but do you guys have a sense of how that format will mature and waterfall in years two and three comp wise. You think it's above maybe what a new store would do -- a normal new store, it settles into a more normal waterfall.

Duncan Mac Naughton -- President and Chief Operating Officer of Family Dollar

Hey John, it's Duncan. Thanks for the question. I think it probably comp like the regular new store is what we're thinking about and we have got handful of them that have kind of cycled themselves. So we're learning quickly, but it's behaving like a new store.

John Heinbockel -- Guggenheim Securities -- Analyst

Okay. And then maybe for Gary, when you -- again, I know that multi-price point is in its early stages here, but if you found anything interesting when you look at the basket constructive people who have Dollar Tree Plus item in there versus those who don't, are there fewer items when they buy a Dollar Tree Plus, how is it different?

Gary M. Philbin -- President and Chief Executive Officer

Thanks, John. I would say at this point, it's purely additive to the basket. So it's telling us, I'm Dollar Tree sharper I come in, I like my regular items and here's something that surprised me is some of the feedback we hear and that goes into what was quote unquote their regular basket. So I think we start-off with some items that are giving us some pretty good information in our customer views but what I'm -- maybe most excited about is putting a bit more of the Dollar Tree whimsy and surprise of the well effect into some of the items and then that will give us another variant to what customers are buying and especially as we get around holiday time, so more to come. We've bought specifically for these stores and it will be in addition to the assortment as we continue to evolve or to get the best rate we can.

John Heinbockel -- Guggenheim Securities -- Analyst

Okay, thank you.

Operator

There are time for few more questions. Our next question comes from Karen Short with Barclays.

Karen Short -- Barclays Capital -- Analyst

Hi, thanks for taking my question. I just wanted to clarify a couple of things. You commented that you were pleased with three key trends at Family Dollar. So I guess I just want to clarify is that to be interpreted that comps are above kind of where you came in 2Q? And then I had another clarification on guidance?

Gary M. Philbin -- President and Chief Executive Officer

Duncan made that comment. I mean, obviously, we're only three weeks [Indecipherable] going to give a whole lot of other information, but I mean we're pleased as why we've stated and I'm going to make a statement whether it's higher or lower, what it might be, but we're very pleased at this point.

Karen Short -- Barclays Capital -- Analyst

Okay. And then just with respect to guidance or not guidance, but I guess lose commentary on 2020. I guess there is just a little confusion with respect to the comments you made in March and I'm asking this question excluding tariffs, but when you think about that 14%, 18%, are you looking at a number that's based on GAAP EPS or adjusted EPS?

Kevin S. Wampler -- Chief Financial Officer

We've said -- we've always said it's based upon GAAP EPS.

Karen Short -- Barclays Capital -- Analyst

Okay, great. Thank you.

Operator

Your next question comes from Kelly Bania with BMO Capital Markets.

Kelly Bania -- BMO Capital Markets -- Analyst

Hi, good morning. Thanks for fitting me into the questions. I just wanted to ask about tariffs. It was helpful to have the quantification I guess of the $26 million over the next couple of months. I'm guessing in terms of list forward that you're still working through that which is why that wasn't quantified, but maybe you can just talk about order of magnitude, how that would compare to what you're quantifying today if you can at all and I guess a couple of other questions related to that, how much have you saved with respect to tariffs by bringing inventory early multiple points throughout this year. And then is there all at upper limit to what you think your team can offset here? Do you feel confident that even if you get into next year, that this can further be mitigated? Thank you.

Gary M. Philbin -- President and Chief Executive Officer

Hi, Kelly. Well, listen, we're managing to what we know. I will start there. I think what we've tried to think the picture of the magnitude for this foray when we knew it was initially 10% that was in our sights and the team went to work right away on 4A knowing that 4B was coming. We had more time on 4B. Once the tariff was increased for both List 4A and List 1, 2 and 3, we just are continuing to do the same playbook that's been working for us, everything they had called out before. So we are in unique times and we are in unique times where I think there is -- the opportunity is, I would tell you that our vendor community is both wants to work through this and help at this moment in time. And part of that is, they are also concerned they might lose business and some have as we have found other opportunities whether inside China or outside China. So there's never this one tune you play to overcome this. So what gives me confidence for the balance of this year is, I can see the rocks in front of me and our teams have worked real hard to overcome, but we see this year. To early to comment on '20, still I'm trying to think about what might have been this week or next week. But we are working real hard on what we know today based on the USTR as we go into -- what's going to be the first increase on September 1st knowing that there is another one in October and then finally December 15. Those are the ones that we know of right now.

Kelly Bania -- BMO Capital Markets -- Analyst

And I guess just on the inventory, how much has been mitigated by just bringing inventory in early?

Gary M. Philbin -- President and Chief Executive Officer

I can't scale on of what we sell. I mean we try to bring items and it's not a huge amount. I mean, of course, we try to bring it in if it's on the water, but keeping in mind in that six weeks before you leave apart and you get somewhere else and we're often not given six weeks to make much of a move. If we can do anything we do, but it's not meaningful on the scale of what we're talking about on cost of goods and the tariffs.

Operator

Your final question comes from Edward Kelly with Wells Fargo.

Edward Kelly -- Wells Fargo Securities -- Analyst

Yeah, hi guys, good morning. Just a few questions for you. First, I just wanted to ask you about the store manager turnover at Family Dollar. I was hoping you could give us an update on the progress that you're making there and the initiatives that you have in place to improve that.

Duncan Mac Naughton -- President and Chief Operating Officer of Family Dollar

Hey Edward, its Duncan. Thanks for the question. I will tell you that store manager turnover has improved slightly. We're still at a level that I'm not happy with, but last year we focused all our training and our field meetings on hear at the manager, which is all about training our people, giving them tools about hiring the right person, training the right person and retaining the right person and we gave them many tools and consistent playbooks across the chain to do that and we have all been trained on that and we highlighted it again this year and we updated those tool-kits and we've had national recruiting fairs as you're probably aware of and we've made progress there. It does attract a fair amount of people.

Gary M. Philbin -- President and Chief Executive Officer

And I would just have to call out, some of the same efforts Dollar Tree is going to have one of its best three years ever since I've been here on store manager turnover. So I think the initiatives are well focused and playing at the right things and we're working real hard to get both banners to ought to be a banner year on store manager turnover.

Edward Kelly -- Wells Fargo Securities -- Analyst

All right. Great. And just a follow-up on Dollar Tree Plus. Any color you can provide on timing around a decision in terms of your assessment of the initiatives and then do tariffs, escalation of tariffs impact sort of strategically how you're thinking about the Plus format?

Gary M. Philbin -- President and Chief Executive Officer

Well, on the timing side, listen I think as we get and evolve the assortment, we're going to learn more. So I can't quite give you a timeline of more interested in what can I learn from giving our customers evolving assortment that will tell us more, but resonates with [Indecipherable] in a Dollar Tree. And as far as tariffs, obviously anybody out there today who is importing is affected no matter what the price point and obviously it goes into the equation, but it does make you take a look at where you are buying it from, but to hit the mark you have to really focus on what the customer wants is always in retail and for our Dollar Tree stores, how does that play out. When we take a look at retail that go up to $5 and I think it's and that's really what we're focused on, what's our customer -- what's our Dollar Tree customer going to look for in our world and that's what our merchandising teams are very focused on.

Edward Kelly -- Wells Fargo Securities -- Analyst

Thank you.

Operator

That concludes today's question-and-answer session. Mr Gary at this time, I will turn the conference back to you for any additional or closing remarks.

Gary M. Philbin -- President and Chief Executive Officer

Thank you, Kathy and thank you for joining us for today's call and for your continued interest in Dollar Tree. Our next quarterly earnings conference call to discuss Q3 results is tentatively scheduled for Tuesday November 26, 2019. Thank you.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Randy Guiler -- Vice President of Investor Relations

Gary M. Philbin -- President and Chief Executive Officer

Duncan Mac Naughton -- President and Chief Operating Officer of Family Dollar

Kevin S. Wampler -- Chief Financial Officer

Simeon Gutman -- Morgan Stanley -- Analyst

Matthew Boss -- JPMorgan Chase & Co. -- Analyst

Chuck Grom -- Gordon Haskett Research Advisors -- Analyst

Judah Frommer -- Credit Suisse AG -- Analyst

Joseph Feldman -- Telsey Group -- Analyst

John Heinbockel -- Guggenheim Securities -- Analyst

Karen Short -- Barclays Capital -- Analyst

Kelly Bania -- BMO Capital Markets -- Analyst

Edward Kelly -- Wells Fargo Securities -- Analyst

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