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Dollar Tree Inc (NASDAQ:DLTR)
Q3 2019 Earnings Call
Nov 26, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to Dollar Tree Inc.'s Third Quarter Earnings Conference Call. [Operator Instructions]

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, Investor Relations

Thank you, Aaron. Good morning and welcome to our conference call to discuss Dollar Tree's performance for the third fiscal quarter of 2019. 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 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 related follow-up, if necessary.

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

Gary M. Philbin -- President and Chief Executive Officer

Thanks, Randy. Good morning, everyone. The third quarter represented another period of solid sales performance for both brands, Dollar Tree and Family Dollar. Our store optimization efforts and sales driving initiatives are working. The teams have completed more than 1,150 Family Dollar H2 renovations, nearly 200 Dollar Tree rebanners and more than 1,000 Dollar Tree Snack Zones and launched our Dollar TreePlus! test already this year. These efforts have driven top line sales and transaction count at both banners.

Fiscal 2019 has been a unique year as the result of several factors. We planned and accomplished the material acceleration of our Family Dollar store optimization initiatives, and the consolidation of our two support centers to Chesapeake, Virginia; additionally, the global helium shortage, which has an out-sized impact on our party business and the continued uncertainty regarding trade and the related tariffs have impacted our business. I'm proud of our team's efforts and the sales execution through this environment.

We worked hard to maintain focus on our customers in our values in store. Our results for the third quarter included sales increase of 3.7% to $5.75 billion, consolidated same-store sales increase of 2.5% and our EPS of $1.08 was within our guidance range. Other highlights for the quarter included completing 247 Family Dollar H2 renovations, completing 512 Dollar Tree Snack Zones, bringing our total to 2,087 across the chain and repurchasing 11.6 million shares as part of our share buyback program.

In the mid-October, we hosted our fourth annual Nationwide Hiring Event focused on hiring more than 25,000 associates in communities all across the country. This event provides individuals with the opportunity to join the Dollar Tree or Family Dollars teams. These new associates can earn the opportunity to be promoted through the field organization. As a growth company, we are always looking for talent and bench strength that can develop into future leaders in our stores. Our application flow was strong for this successful hiring event.

Regarding Dollar Tree segment sales highlights for the third quarter, we delivered a 2.8% comp, representing the 12th consecutive quarter of comps exceeding 2%. Dollar Tree had increases in both traffic and ticket with traffic slightly outpacing the ticket increase. Geographically, all zones comped positively and we're at or better than 2%. Strongest performing zones were in the Northeast, the upper Midwest and Southwest. Our cadence of comps through the quarter all three months were better than 2%, with August being the strongest month. Dollar Tree continued to deliver solid positive comps in the consumables category. And our seasonal business continued to perform very well like Halloween was on par with a very good seasonal sell through we've been experiencing over the past couple of years.

Our variety business, which includes party at Dollar Tree comped positive each month during the quarter, but was again impacted by the helium shortage. We estimate that our comp was negatively impacted from lost balloon sales by about 20 basis points. We expect this helium shortage headwind to continue, but to a lesser degree for the remainder of 2019. The Dollar Tree merchant team continues to do a terrific job of delivering ever-changing and new product ideas, that drive customer excitement and repeat visits. Dollar Tree WOW is the excitement that our customers have come to expect.

Snack Zones have started 27. We have rolled out to great success. And we continue to extend this initiative into more Dollar Tree stores. Last year, we had an Hallmark Cards to all stores across the chain, is proving to be a great partnership and customers certainly love the Hallmark brand, the offering and the value. And this year we've been rolling out a new program called Crafter's Square. Crafter's Square is now in more than 600 Dollar Tree stores and has a new and expanded selection of arts and crafts supplies all priced at $1. Feedback from stores and customers has been fantastic and we will continue to expand this traffic driving initiative to more stores going forward. The sharing of projects within the crafting community on Pinterest, Instagram and other platforms has made this one the quickest launches to our customers on a small base of only 600 stores.

Let me give you an update on Dollar Tree Plus! As we've discussed previously, we are conducting a test of multi-price points at select Dollar Tree stores. The multi-price assortment is an increment of $2, $3, $4 and $5, is being tested in 115 stores. We just reached the six-month mark in the initial stores as the majority of the test stores were added in June, and we are closely monitoring performance, including impact to traffic, sales, margin and of course, customer feedback, as always with test we follow an iterative process where we test, learn, modify and improve along the way.

Our focus regarding multi-price point test as we finish this year and move into 2020, will be on delivering great values to our shoppers within targeted categories. Shifting more toward discretionary and unique products that we believe delivers the wow factor to consumers and as additive to the basket and margin profile. Utilizing our broad vendor base sources great value products and showing as always that we protect the Dollar Tree brand. Our brand is more than the items we sell for a dollar. The Dollar Tree brand represents surprising value and that the customers get tremendous value for what they spend at Dollar Tree. Our efforts to drive this test should include extending our reach by adding great value, exciting merchandise and opportunities to expand margin. We are still early in this test and look forward to updating you as the test evolves.

Family Dollar team, delivered another quarter of positive comps with a 2.3% increase. Accordingly, comparable transaction count for the quarter was positive, continuing the trend that began to emerge in mid-summer. Change performance demonstrates that efforts to improve the consistency of execution across the chain and efforts to drive H2 performance are working and are gaining traction. The Family Dollar segment highlights for the third quarter; our consumables business performed very well delivering its 12th consecutive quarter of positive same-store sales. Our cadence of comps through the quarter, all three months were better than 1.5% with August being the strongest month. From a zone perspective, comps for six of our seven zones were positive with the strongest performance in the west, southwest and southeast zones.

Our Family Dollar customer service scores for Q3 showed improvement from the prior year; categories of store cleanliness, product assortment, speed of checkout were among the notable improvements. We continue to believe we are taking the right steps to transform our customer experience to increase the frequency of their visits. These steps include improving customer satisfaction, developing brand and price reputation, focusing on opening price points, incorporating better organized and focus dollar impact sections, and sorting more on what our customers need including Frozen Foods. And as we expected, the average scores for H2 stores where we have invested in our fleet are higher across the board.

We continue to be very pleased with the performance of our H2 store format at Family Dollar. All new and remodeled stores are in this format, which is driving greater loyalty, repeat visits and value perception in these locations. These renovated stores continue on average to deliver a comp greater than 10% in their first year post renovation. We are committed to this format and plan to renovate at least 1,000 Family Dollar stores to the H2 format in fiscal 2020. We began rolling out the H2 format in Q3 last year. We continue to like the sales that we are seeing in the H2 stores now cycling into their second year. Our efforts to drive performance across the store base continue to focus on initiatives around our private brands with Compare and Save. Our smart coupons, they offer our loyal customers the latest and best values. Hallmark cards will be coming to all Family Dollar stores in 2020. And of course, our store manager training and retention efforts as always to drive performance and consistency store-by-store.

In our store support center, we are seeing the benefits of having our teams Dollar Tree and Family Dollar together in one location. We anticipate being together will greatly enhance our culture, our ability to recruit great talent, and improve the collaboration within our organization, as we train and develop and provide even more and better support for our stores.

Looking at real estate for both segments in the third quarter, we opened a total of 165 new stores, 114 Dollar Trees, two in Canada and 51 Family Dollars. We relocated or expanded 12 Dollar Tree and three Family Dollar stores. We renovated 247 Family Dollars as a part of our H2 renovation initiative. And we rebannered 39 Family Dollars to Dollar Tree stores for a total of 463 projects during the quarter. We also added freezers and coolers into 138 Dollar Tree stores, bringing our total to stores with freezers and coolers to just over 6,000. During the quarter, we closed 42 stores, 12 Dollar Trees and 30 Family Dollars, and we ended the quarter with 15,262 stores, 7,447 Dollar Trees, 7,815 Family Dollars.

Before I turn the call over to Kevin, I'd like to provide a brief update on tariffs just prior to our last earnings announcement. August, the USTR announced that tariffs on List 1, List 2, and List 3, products would increase from 25% to 30% on October 1st; tariffs on List 4A, products would increase from 10% to 15% on September 1st; and tariffs on List 4B products would increase also from 10% to 15% on December 15th. As noted in our August earnings announcement, our outlook provided at that time did not include any impacts related to these changes. Our updated outlook includes approximately $19 million of cost of goods sold with the expected impact from USTR tariffs for List 1, List 2 and List 3, as well as List 4A and List 4B tariffs fully implemented in Q4. Nearly, all the expected impact is related to the introduction of List 4A tariffs.

Now I'll turn the call over to Kevin.

Kevin S. Wampler -- Chief Financial Officer

Thanks, Gary, and good morning. Consolidated net sales for the third quarter increased 3.7% to $5.75 billion, comprised of $3.07 billion at Dollar Tree and $2.67 billion at Family Dollar. Enterprise same-store sales increased 2.5%. On a segment basis, same-store sales for Dollar Tree increased 2.8% and Family Dollar increased 2.3%. Overall, gross profit was $1.7 billion, compared to $1.67 billion in the prior year's quarter. Gross margin was 29.7% of sales compared to 30.2% in Q3 of 2018.

Gross profit margin for the Dollar Tree segment decreased 60 basis points to 34.2%, when compared to the prior year's quarter. Factors impacting the segment's gross margin performance for the quarter, included merchandise costs, including freight increased approximately 55 basis points, primarily due to higher freight costs and distribution costs increased approximately 10 basis points primarily due to higher payroll costs and depreciation. Gross profit margin for the Family Dollar segment was 24.5% during the third quarter compared with 25.3% in the comparable prior year period.

The year-over-year decline was due to the following; merchandise costs, including freight increased approximately 30 basis points, driven primarily by an increase in freight costs and higher sales of lower margin consumable merchandise, partially offset by improved initial markup; shrink increased approximately 15 basis points, resulting from unfavorable physical inventory results in the quarter; distribution costs increased approximately 15 basis points due to increased payroll costs of the DCs; occupancy costs increased approximately 10 basis points due to an increase in real estate taxes; and markdown expense increased approximately 5 basis points, resulting from higher clearance activity in the quarter.

Consolidated selling, general and administrative expenses as a percentage of net sales in the quarter increased 30 basis points to 23.5% from 23.2% in the same quarter last year. For the third quarter, the SG&A rate for the Dollar Tree segment as a percentage of sales increased to 22.1% compared to 22% for the third quarter of 2018. The increase was due to store operating costs increased by approximately 15 basis points resulting from increased debit, credit card fee penetration and an increase in loss on disposal of fixed assets from an earlier lease termination in the quarter. Payroll cost decreased approximately 5 basis points, primarily due to lower retirement plan expenses and lower insurance benefit expenses compared to prior year's quarter, partially offset by an increase in store hourly payroll due to higher average hourly rates and an additional hours to support store initiatives.

SG&A expenses for the Family Dollar segment were 22.5% of sales in the third quarter compared to 22.2% of sales 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 expenses increased approximately 25 basis points, resulting primarily from higher costs related to the disposal of fixed assets in connection with our store optimization initiative; and depreciation and amortization expense increased approximately 10 basis points as a result of the capital investment required to support the H2 initiative.

Corporate and support expenses increased 10 basis points, primarily related to store support center consolidation costs and higher depreciation. This included approximately $4 million of expenses related to the Q3 2019 discrete costs associated with our store support center consolidation. For the quarter, the company incurred approximately $9 million on total discrete costs, which was consistent with our guidance. On a consolidated basis, operating income was $358.4 million compared with $387.8 million in the same period last year and operating income margin was 6.2% of net sales compared to 7% of sales in last year's third quarter. Non-operating expenses for the quarter totaled $41.5 million, which was comprised primarily of net interest expense.

Our effective tax rate for the quarter was 19.3% compared to 17.1% in the prior year's third quarter. The prior year quarter benefit by $15.7 million based on the company's substantial completion of our analysis of The Tax Cuts and Jobs Act on the net deferred tax liability valuation. The current year tax rate reflects the benefit of statute expirations and the reconciliation of the tax provision to the tax return.

For the third quarter, the company had net income of $255.8 million, or $1.08 per diluted share. This compared to net income of $281.8 million, or $1.18 per diluted share in the prior year's quarter. Providing cash and cash equivalents at quarter end totaled $433.7 million, compared to $422.1 million at the end of fiscal 2018. Our outstanding debt as of November 2nd was approximately $4.3 billion. During the third quarter, we repurchased approximately 125,000 shares for $11.6 million. At quarter end, we had $800 million remaining on our share repurchase authorization. We will provide updates on additional share repurchases, if any, following the quarter in which they may occur.

Inventory for the Dollar Tree segment at quarter end increased 14.4% from the same time last year, while selling square footage increased 7.5%. Inventory per selling square foot increased 6.4%. Our inventory levels reflect the early receipt of imports to mitigate tariffs. We believe the current inventory levels are appropriate to support the scheduled new store openings and our sales initiatives for the remainder of the year. Inventory for the Family Dollar segment at quarter end decreased 4.2% from the same period last year and increased 0.9% on a selling square foot basis. Based on store closures of Family Dollar segment has 5.1% less square footage outstanding.

Capital expenditures were $279.8 million in the third quarter versus and $228.4 million in the third quarter of last year. And for fiscal 2019, we are planning for consolidated capital expenditures to be approximately $1 billion consistent with our initial outlook. Depreciation and amortization totaled $160 million for the third quarter and $150.5 million in the third quarter last year. For fiscal 2019, we expect consolidated depreciation and amortization to be approximately $635 million.

We've updated our outlook for fiscal 2019 and have lowered our guidance for Q4 based on the following expected effects. With regard to tariffs and USTR announcements, we estimate that Section 301 tariffs will increase our cost of goods sold by approximately $19 million, or $0.06 per diluted share in the fourth quarter, if the tariffs are fully implemented. Almost all of the cost was due to List 4A, as its timing did not allow for significant mitigation. We expect additional pressure on merchandise margins based on lower margin consumables growing faster than originally forecasted. We expect distribution costs to be higher than originally forecasted, primarily due to payroll cost pressures from higher turnover, which may affect productivity. Expenses related to repairs and maintenance, utilities and depreciation are now expected to have a higher run rate than originally forecasted.

Additional assumptions of our outlook are the calendar considerations for the remainder of the year, which is that there will be six fewer selling days between Thanksgiving and Christmas, which will negatively impact Q4 sales. We expect continued pressure on store payroll based on competitive markets, states increasing minimum wages, unemployment levels and completing the company's initiatives plans, including H2 renovations and Snack Zones. We estimate year-over-year domestic freight cost as a percentage of sales to be slightly lower in the fourth quarter. Import freight rates as we noted on last quarter's call will increase based on our April rate negotiations and beginning in January 2020, as a result of low-sulfur fuel requirements for ships.

Net interest expense will be approximately $41.9 million in Q4. We cannot predict future currency fluctuations. We have not adjusted our outlook for currency rate changes. As always, our outlook assumes no additional share repurchases. Our outlook assumes a tax rate of 22.3% for the fourth quarter and 21.4% for fiscal 2019. Weighted average diluted share counts are assumed to be 237.7 million shares for Q4 and 238.2 million shares for the full year. For the fourth quarter, we are forecasting total sales to range from $6.33 billion to $6.44 billion and diluted earnings per share in the range of $1.70 to $1.80. These estimates are based on a low single-digit increase in same-store sales and year-over-year square footage growth at 1.1%.

For fiscal 2019, we are now forecasting total sales to range between $23.62 billion and $23.74 billion based on a low-single digit same store sales increase of approximately 1.1% selling square footage growth. The company anticipates GAAP net income per diluted share for the full fiscal 2019 will range between $4.66 and $4.76, which includes discrete costs of approximately $85 million, or $0.28 per diluted share, approximately $15 million, or $0.05 per diluted share in store closure related costs, and approximately $19 million, or $0.06 per diluted share related to tariffs.

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

Gary M. Philbin -- President and Chief Executive Officer

Thanks, Kevin. Like I mentioned at the beginning of the call, 2019 has been a year of distinct opportunities. We planned and executed the material acceleration of our Family Dollar store optimization initiatives, Snack Zone resets have more than 1,000 Dollar Tree stores and the consolidation of our two banners to our store support center in southeast Virginia. We accomplished this against the backdrop of the helium shortage, the uncertainty regarding trade and related tariffs, continued impact of freight costs, and DC costs affected by the increasing starting wage rates. And part of the sales results at both Dollar Tree and Family Dollar that were accomplished in the quarter, which was done in the first three quarters of year with more than 2,000 stores disrupted from our initiatives, invested in our stores, our starting rates in specific markets and have our fleet of stores ready for the fourth quarter in the key holidays.

As stated in today's press release, we also announced that we have to do at least another 1,000 H2 renovations in 2020. Our confidence in this model grows as we have more across our fleet of stores embrace types of settings, demographics and densities of population. We will announce our new -- another store level of capital plans for 2020 at the end of Q4. The impact on our gross margin in specific areas is ours to control and do better. We are focused on making improvements across several categories as we finish the year and start 2020. These areas include improving our shrink results, enhancing efficiencies within our supply chain to better manage freight costs, driving sales on the discretionary side of our business to reduce mix headwinds to margin and tariff mitigation efforts.

With shrink, our plans are focused on enhancing allocations and right-sized inventories to all of our stores, especially those with a high shrink history; continued focus on training throughout our field leaderships, district and store teams; adding loss prevention tools within our stores; and last week, we are pleased to bring on a seasoned, experienced retail executive in a Senior VP role to lead both our Dollar Tree and Family Dollar Asset Protection teams. We asked our protection teams from both banners will report to him effective immediately and our visibility to market issues external and internal will be enhanced with the combined teams in priority high shrink markets.

Our opportunities across our supply chain and freight costs are focused on optimizing our less than truckload inbound costs, bidding our key freight lanes, continuing to reward our best carriers by building that deliver on cost and service and gain back to our historical backhaul levels. On the discretionary side at Dollar Tree, we are working hard to overcome our helium shortage with more party-centered items to service our customers. For Family Dollar, we like what H2 has done for the top line and transactions, or focusing specifically around the impact on driving more discretionary within our stores. This includes our well tables; our Dollar impacts sections and the queuing assortment at checkout. You still have more runway for all of these discretionary sales in these areas.

We're building on important categories that are doing well, especially around mom with kids across a combination of all things needed for young kids, including infant apparel and baby names, enhancing our party footprint with the addition of Hallmark branded cards and Family Dollar through the first half of 2020. For Tariff mitigation, we are planning to continue efforts to mitigate ongoing and potential new levels of tariffs as we head into 2020. These efforts include the continued support of many vendors to lower cost, the redesign our product or packaging, efforts to shift mix between higher and lower cost products, awarding volume from multiple vendors to our most competitive suppliers, moving product out of China to affect lower landed cost of goods and our combined teams' purchasing power throughout all of Asia. And as always finding new vendors domestically and another countries to develop the new and exciting values that our customers have come to expect.

We are in the planning stages for 2020, and we will provide details related to 2020 outlook on our fourth quarter earnings call. I believe our store teams are well prepared for the holiday season. I would like to sincerely thank each of our associates as we head into the fourth quarter and holiday season. More than 15,000 stores across US and Canada, our network of 25 distribution centers, and of course, our store support center in Virginia, I thank all of them for their commitment, dedication and efforts to deliver value and convenience to our shoppers each and every day.

Finally, 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 increased value for our shareholders. The combination of more than 15,000 Dollar Tree and Family Dollar stores provides us the opportunity to serve more customers in all types of markets. The combination of two great brands provides great flexibility in managing our future growth.

Operator, we're now ready to take questions.

Questions and Answers:

Operator

[Operator Instructions] We'll go first to Scot Ciccarelli with RBC Capital Markets.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Good morning, guys. Can you talk about the margin profile on the remodeled Family Dollar stores and related to that given the mix that you have in those remodeled stores, which is much more consumable based. Is there a reason to believe gross margins can improve on a go-forward basis, or is that higher mix of consumables in these stores effectively reset the gross margin profile for Family Dollar? Thanks.

Gary M. Philbin -- President and Chief Executive Officer

Hey, Scot, this is Gary. You know we're pleased with H2, because when we went into this, we knew we are adding in more frozen food doors and some more food that's obviously, has an impact on margin. But we also went into it with the thought of what's offset that with some of what we do on media consumption, the queuing lines, WOW tables. I just think some better adjacencies throughout the store. Early on, we saw some degradation in margin, but as we sit here now H2 is neutral to the fleet. But we didn't do this to be neutral. I really -- our goal here is to have margin expansion within H2. So we're on the right path, we've got traffic going in these stores and obviously, you've heard us call on the comp. Our next workflow is to maintain all of that and add margin expansion to an H2, we like everything that the customers are telling us about it. We like that results on the top line and sales and we got to get going on the margin mix now.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

And what kind -- on a go-forward basis, Gary, and that's helpful, but what kind of margin improvement do you think is realistic, if we're looking at or the next, I don't know, four to eight quarters. Because I mean, we've seen several hundred basis points of gross margin degradation in that business. And I guess, I just kind of keep coming back to the question, do we have a true reset here, or is that something once we establish the better top line, we can kind of figure our way out?

Gary M. Philbin -- President and Chief Executive Officer

I've always said we need to get to an inflection point on the fleet. We were rebuilding stores, basically one store at a time with H2. We did over a 1,000 in the first three quarters this year. We're planning on doing a 1,000 next year. I need the top line sales, I think that's what H2 has given us. The work on the margin, Q3 for Family Dollar, I think it was about an 80 points difference year-over-year comparison. The expansion that can rise across the whole fleet are some of the things I talked about. We got to focus on the discretionary seasonal, apparel, electronics, all those are the categories that I think teed up in the right way in H2. It doesn't mean that the rest of the fleet can benefit from some of the same elements and efforts across the fleet.

So we're putting together our '20 plan with specific initiatives around those discretionary categories to drive the -- maybe get the same benefit that we've really seen on the consumable side. We got more folks coming through the front door here. And that is as important as anything that we do. And now I got to get them over the other side of the store to buy more of the discretionary product, that's doable. More to come when we announced our 2020 plan.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Okay. Very helpful. Thanks guys.

Operator

We'll go next to Michael Lasser with UBS.

Michael Lasser -- UBS -- Analyst

Good morning. Thanks a lot for taking my question. So what would you think you'll have a reasonable level of visibility into the business? The factors that you mentioned that's of tariffs, that contributed to your 10% to 15% decline, the reduction in your 4Q guidance, including mix, payroll pressures at the DCs and increased run rate for repairs and maintenance, utilities and depreciation. Should have been somewhat known and not really surprising. So is it once you get past this, then as we get into the first part of next year, you feel confident you have a level of visibility into the profitability of this business, or is it going to take longer than that?

Kevin S. Wampler -- Chief Financial Officer

Micheal, this is Kevin. Yeah, I think as we look at it, the items we called out -- obviously, the shift in mix, as we've seen the -- basically, the consumable business outpace even what we have forecasted and really that's in both brands more so in the Family Dollar brand than the Dollar Tree brand, but it's in both brands. So the Dollar Tree brand, we've got some good things going with frozen food refrigerated and in center aisle as well. So a lot of things going on there. And again a little bit of overall effect from the helium shortage and the halo effect to the party department in general.

On the Family Dollar side, obviously, we haven't seen the discretionary business kick-in as well as, we'd like it to Gary, what he was just speaking to, a lot of opportunity there. Getting customers in the door is key, obviously, and getting the foot traffic and having that opportunity to sell them that discretionary item is, is very, very important. I think, as we obviously look at other pieces of the business, obviously, we called our DC costs, really this is not an area we've called out in the past, so much. It's really been more of a -- more of bigger topic as of late as we've gone into the -- we would call our seasonal peak here and the -- in the end of Q3, we're getting a Q4, as we look at basically, getting all the merchandise through these buildings. And with unemployment worth that, it's obviously, required us to bring up basically starting wages and making sure we can engage with those associates and train them appropriately.

Gary M. Philbin -- President and Chief Executive Officer

Hey, Michael, Gary. I would just add this. Keep in mind, this was a year that, it was everything we talked about at the beginning of the year. The store initiatives 2,000 stores at various times tone up. Keep in mind at the DC level, we were also not just shifting rebanners back and forth. We are also shifting product back and forth, especially with the impact of our Dollar sections and some of our well items. So along the way we combined store support center too. With all those balls in the air I give credit to our store teams and our store support teams to get that done. Every time we're talking about here gives us the consistency, visibility as we go forward in '20. We have done all this really with major initiatives both in our store base, in our store support center. So, listen, the things that we're focused on are the right things to drive the business and with all that going on, we drove sales throughout the year and with the H2 stores building momentum throughout the year, I'm really pleased with where we will head up on the top line and the initiatives around the margin piece, we got to get after on each of them.

Michael Lasser -- UBS -- Analyst

Totally reasonable Gary. It just seems like investors want some time frame, when they can hold you accountable to an improvement of profitability and better visibility because there have been a lot of disappointment over the last few years. And having some sense of when that might turn will be helpful to the investment community. And as part of that are you still committed to the 14% to 18% EPS growth of your original GAAP guidance that you provided earlier in the year for 2020, and why would that no longer be the case?

Gary M. Philbin -- President and Chief Executive Officer

Yeah, Michael, as we've said before that was at a point in time, with what we knew at that point in time, obviously, we're working through and finishing up our 2020 plant. Obviously, the biggest unknown as we sit here today for us and many other retailers was tariffs and where does that land at the end of the day. So, obviously, we're committed to improving our business and improving on the many things we've talked about already this morning, but whether we'll give obviously, guidance when we get to our fourth quarter call and hopefully, we'll have some clarity around all those things.

Michael Lasser -- UBS -- Analyst

Okay. Thank you very much, and have a good holiday.

Operator

We'll go next to Paul Trussell with Deutsche Bank.

Paul Trussell -- Deutsche Bank -- Analyst

Good morning. Thanks for taking my question. I know, you give guidance on a consolidated basis, but to the extent possible, could you give maybe a little bit more detail regarding your expectations per banner? As we think about comps and gross margin and SG&A into fourth quarter. And then as a follow-up. Just bigger picture for Dollar Tree. Margins look like they're going to be down this year. And just curious, if you can walk through what some of those -- what you view as more temporary in nature, as we kind of turn the page into 2020. Is this a business that you believe can get back to expanding margins? Thank you.

Kevin S. Wampler -- Chief Financial Officer

Hey, Paul. This is Kevin. Yeah, I think, as we look at it, again, we don't give guidance by banner, obviously, when you look at it from a -- what I can give you a little feel for Q4, is that if you look at the guidance we gave today, and you can back into a range of operating income based on all the data we've given you. And I would tell you that it's basically right around 9%, or just above. If you compare that to prior year, excluding the items such as the markdowns for aged goods of the clearance of inventor and in-store impairment, I would tell you that the pressure between -- basically, gross profit and SG&A is fairly consistent. So we're seeing pressure on both line items. So that just gives you some directional ability to think about that.

I think as we look at, at this year, and as we look at, obviously, the fourth quarter, fourth quarter is a big quarter for Dollar Tree from a seasonal perspective, so we get a pretty good boost in sales just from a seasonal set, which is obviously as always provided us the ability to basically provide a good gross margin, and I don't see that in there. But our seasonal set this year performed very well. We had a very good Halloween set. We had a very good performance with our Halloween seasonal. And we feel good about going into the fourth quarter with our Christmas set. So I think that always bodes well. Obviously, we do have the six best selling days, but that doesn't mean we're not going to try to make sure we do everything we can to get every last sales dollar that we can at the end of the day.

Gary M. Philbin -- President and Chief Executive Officer

Paul, this is Gary. Let me sort of answer your question. What's temporary and start with Dollar Tree. The things that we've been chasing this year, start with shrink, it's a both banner issue, but shrink is something I have an expectation we're going to do better on next year. We're coming off of a second year of not great performance and we can do better. I think the freight piece, we started talking about last year was certainly a bigger impact in the first half. We're going to see some of that modify in the second half, but we're still significantly up year-over-year.

And the distribution cost, I think, first, I don't know if it's temporary or not, I know that impacts us when we have more folks coming into a DC, and it's really not even what you had to pay folks, again, the DC, it's some of the productivity that you lose in the DC, because you've got you folks that you got train and retain. Those are the things that I think were the one-offs that for both banners that I would expect us to make improvement on and the initiatives we talked about.

The mix on product, to me is a bigger issue at Family Dollar than it is at Dollar Tree. We are happy with what H2 has done, but across 2019, we've worked hard on keeping sales going. And we just got to find some of the same elements that drive customer traffic into those sections as they do on the consumables. For Dollar Tree, I don't know how to think about tariffs, but as always, it's going to be about incorporating the next well into the stores. We like what Snack Zone has done for a lot of pressure mix that's how we got Crafter's Square going. Year before that, we started out Snack Zones, but we put in the Hallmark.

So, it's always what we push and pull with to drive customers on both foot traffic and sales and margin. We're going to do that again as we go into '20. So those are going to be the pieces that we talk about category-by-category. Hope that's helpful.

Paul Trussell -- Deutsche Bank -- Analyst

Yes. Thanks for the color. Best of luck.

Operator

We'll go next to Peter Keith with Piper Jaffray.

Peter Keith -- Piper Jaffray -- Analyst

Hi, thanks. Good morning, everyone. So I want to look at the tariff impact. Certainly, it's a very volatile situation with a lot of unknown changes. It sounds like, though the impact to Q4 is really just because of the timing with List 4A implement, that you didn't have time to adjust. Are you still confident, if you look at the 2020, do you think you'll be able to mitigate most of the List 3 and List 4 tariff pressures?

Gary M. Philbin -- President and Chief Executive Officer

Peter, this is Gary. List 1, List 2, List 3, I think, the teams have been through a couple of cycles now of working with our vendors to, either explore our cost or redesign packaging, so we can land it. And in some cases we're moving outside of China, as you've heard us talk about and even on those class trip. As we are buying already Fall and Halloween next year, we've moved additional product out of China. So you're not going to be able to pick up that entire supply chain, but that's where we do sometimes item-by-item, vendor-by-vendor as we see those opportunities.

As we go and do 4A and 4B, it's more of our product. And as always I want to go on to 2020, I think with some compelling product. And we're going to do the smart things around what we have to do the best we can to mitigate. But I've also chose -- our merchant teams at the end of the day, I want to be able to see what it is. We might be changing, or the opportunity to move right away from a vendor to another country, before we do it. So 4A, what we've seen is, where it gets announced and we don't have much time to mitigate, that's what we're calling out with the Q4 impact. Going forward, when we get a chance to get on a regular cycle buy and meet with our vendors, yes, we can mitigate more of it. I just don't have full vision of that we go on a big buying trip in January, which will be our first time really to meet with all of our vendors, and I'm assuming at that point 4B is an effect as well.

Peter Keith -- Piper Jaffray -- Analyst

Okay. Thank you for that. And then just on the discussion of mix, particularly with the H2 remodels. One thing I'm trying to get my head around is, it would seem that with the increase of $1 items that you'd be experiencing greater buying scale with the similar items from Dollar Tree and Family Dollar. So it does seem to me at least from the outside that there would be some benefits, to mix from $1 items. So -- are we misreading that, or is it just that the discretionary weaknesses is overarching negative on the business?

Gary M. Philbin -- President and Chief Executive Officer

No, you heard me to ask a little bit about H2 four-wall margin is about neutral to the fleet. And so that overall mix change that we're experiencing is no different at H2. What's different is that we invested heavily with more of our lower margin frozen food and additional expansion of some key categories in center of the store food as well, that's lower margin. That's been offset. You're exactly right with the impact of the dollar sections, with the queuing assortment, with Dollar WOW tables with immediate consumption. So the fact that we're back to fleet neutral margin, I think shows the power -- some of those sections. We just got and you put up another level to get margin accretion going in an H2 store. So, the way I look at with the team, we almost take a look at here is the sections, we've invested in, what's our sales and margin on our frozen food category. And is that being offset with some of those other sections and that's pretty much what we're seeing right now.

Peter Keith -- Piper Jaffray -- Analyst

Okay, thanks. That's helpful. Good luck this holiday season.

Gary M. Philbin -- President and Chief Executive Officer

Thank you.

Operator

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

Joseph Feldman -- Telsey -- Analyst

Hi, guys. Thanks for taking the question. Just wanted to get a little more understanding of like the higher price point test and from what -- how are people responding to that so far?

Gary M. Philbin -- President and Chief Executive Officer

Yeah. I would say as folks come in, I would say it's one-third folks of saying the product and buy it one-third of our loyal customers have commented that they don't like the margin price point in our stores and one-third are somewhere in the middle. Here is my view from everything we've interviewed our customers with. It's not so far, we've had a priority on more consumables, which I think were an item that we want to tariffs, get out there across categories. The next phase of the test is more about what I would call the Dollar Tree WOW side of it. We went over on our buying trip this July to buy specific categories. So I would call them more on our variety discretionary side, things that people haven't seen. And we'll see how customers respond, but I think that's more to what our customers are going to enjoy, seeing incredible values on, and allow us under our Dollar Tree WOW umbrella to say that's a great item. I don't see anywhere else, and I know that costs more when I do see it. And I think that's going to be what we push on into some of those showing up in stores now, but into 2020.

So, when we get a chance to test and learn and put new products in especially when we can design them and import them, or find discretionary items domestically, I just think that's going to be the next phase of the test that gives us another important data point. Our customers that buy it, tend to buy more than the average Dollar Tree transaction, but I go back to what success. And success in there is really to increase the reach of Dollar Tree to another segment of customers, another chance to increase margin, as well and as always protect the brand to say this is the WOW factor at Dollar Tree. So those are the things that are in the mix. I think, we have some exciting product coming in, and we stay close to our watching that week-by-week.

Joseph Feldman -- Telsey -- Analyst

Thanks, Gary. And then one follow-up. I know you outlined a couple of efforts on the freight side, that you can do like optimize LTL and back to historical backhaul levels. Like how challenging a project is that to improve the freight side? Like, is that something that we can see happen pretty quickly into next year?

Gary M. Philbin -- President and Chief Executive Officer

Well, we are seeing some modest year-over-year declines right now with it. And the things that we're doing we're in control, but we need to bid out the process. Now somebody has to sign up for the lower bid and give us great service both on inbound and outbound to get those rates. So, you know, I'd like to think that it's something that as we read some of the same headlines, we are not in the same position as the truck driver shortage exactly at this time a year ago. I think that bodes well for us. The opportunity when we get better service on the outbound allows us to do more back-hauls. So we're going to go into 2020 pushing all the levers we know to do to get both lower freight and better service and it was understand better once our important third-party suppliers and independent truckers continue to give us service as we expect to as we finish out to Q4 into 2020.

Joseph Feldman -- Telsey -- Analyst

Thanks. Good luck with the holidays. Thank you.

Gary M. Philbin -- President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] We'll go next to John Heinbockel with Guggenheim Securities.

John Heinbockel -- Guggenheim Securities -- Analyst

Hey, Gary, curious when you think about the real estate composition of the 1,000 remodels you're going to do with Family Dollar this year -- this coming year, how will that be different than this past year? Is there a desire maybe to cluster more? And if you do cluster more, can that lift the brand perception at non-remodeled stores, if you do that?

Gary M. Philbin -- President and Chief Executive Officer

Well, we do take a look where is the number of stores. We went into this, knowing that we want to fix some of the older stores in the fleet. So based on the last year talk, we went into with the best opportunity based on volume, we do need a certain size. And really what we're scaling to is by the time we finish these next 1,000. we ought to be close to 40% of our fleet, or a little better being less than five years old. And I think to your point that does give our customer give a perception of what they've seen at Family Dollar. So it's not necessarily that everything has to be H2. We got some great stores out there that are not, but we are changing the face of what the customer sees with this store initiative along with what we close along with what we rebannered to Dollar Tree.

So the combination of all those things gets us closer to an inflection point, which is I think what you're talking about, what does that customer see. And inside the store the consistency around store standard conditions, in stocks are important across all the factors of the different stores that we run. So, that's what we're aiming for. And as we get more and more stores with the same opportunity, we're still measuring it, that's our biggest return on capital as we go and invest in these stores. But I think just by the nature of our fleet with where we are across the country, we're starting to get some critical mass into some key geographies.

John Heinbockel -- Guggenheim Securities -- Analyst

And then lastly, when you look at the private brand penetration opportunity, recognizing it's all consumable at FDO, but is that another 500 basis point penetration opportunity, is it much bigger than that. What do you think that shakes up?

Gary M. Philbin -- President and Chief Executive Officer

Well, we've already said we're in the low-20s, as a brand which is pretty darn good. I mean, it's not that grocery stores risk, because we're not a grocery store. But I think across the categories, what I would like to see is, something closer to a 100 basis point improvement consecutively over a number of years. I think that's the opportunity in front of us. And I think it speaks to one having great product and values and store. And number two, our customer just needs it, because she's stretching our budget and the commitment on what we compare and save two national brands, I think fits on our wheelhouse. I think the magic to it as always is introducing customers because they will step up to private brands on something that first is something that they try hard because it's a detergent and then we'll go to HPA products, and then we'll go to food products. And the team has done a wonderful job on rebranding across the different categories. And I think that's opportunity is still with one way to it.

John Heinbockel -- Guggenheim Securities -- Analyst

Thank you.

Gary M. Philbin -- President and Chief Executive Officer

Thank you.

Operator

We'll go next to Karen Short with Barclays.

Karen Short -- Barclays -- Analyst

Hi, thanks. Just one clarification question on tariffs and a bigger picture question. In terms of the $19 million, is it still fair to think of that split kind of 70% Dollar Tree and 30% Family Dollar, in terms of the impact? I think that was the original you gave back a couple of quarters ago?

Gary M. Philbin -- President and Chief Executive Officer

Hi, Karen, the -- as you look at the $19 million, it's more skewed to Dollar Tree than the 70%. So, the vast majority really relates to Dollar Tree small piece of it does relate to Family Dollar.

Karen Short -- Barclays -- Analyst

Okay. And then I guess, just in terms of Family Dollar 2.0, I guess I'm wondering if you could give a little color on what the second year sales lift is, I know it's still early days, but any color there. And I guess, maybe a little color on, why you think it's you are having more challenges in terms of getting the discretionary spend in those stores?

Gary M. Philbin -- President and Chief Executive Officer

I would say, when we think -- let me to answer the second question first, it's -- it's still a customer that comes in, and I think is responding to what we've done. I mean, you just buy consumables on a weekly basis, the discretionary type, sometimes to the seasons, but more times when I have for our customer, a little more jingle in our pocket across the discretionary categories. So, it's a piece of always we got to have the right values in front of our customer across the each of the categories.

So in our -- maybe a part of this, Karen, I would even say as we went in just knowing 2,000 stores is going to be disrupted, a 1,000 plus at Family Dollar. We went into this year saying, this is not the year to -- now we have food traffic coming in, H2 has been giving that to us. We've been hitting the gas, it's not just been H2, that's driving the comp. So all of those have been rising. I think that was important with knowing we were going to have the down stroke on the store initiative going into it. So, I think we just had some better compelling values in front of the customer on the consumable side. And not that we don't give us all the thought to how we laid out the store. But I think we got to get back to the basics of blocking and tackling on the discretionary side.

Karen Short -- Barclays -- Analyst

Okay.

Gary M. Philbin -- President and Chief Executive Officer

What was the other piece of the question.

Karen Short -- Barclays -- Analyst

A year or two, H2 comp?

Gary M. Philbin -- President and Chief Executive Officer

We're early -- I mean, yeah, we like the comps, yeah, like, as we get more stores into this. I mean, we just finished up 1,100 and change of H2, that profile has stayed consistent with the addition of more stores across geographies, across sensitives of population. So, we do like that. I think as we came into the second year here, it's -- there stores are still cycling some of their grand opening activities from last year. So, more to come as we get more stores into that bucket.

Karen Short -- Barclays -- Analyst

Okay. Can I just ask one more question regarding Dollar Tree banner?

Gary M. Philbin -- President and Chief Executive Officer

Sure.

Karen Short -- Barclays -- Analyst

Is there any variation in terms of the various stores on urban versus suburban versus rural. I mean, you kind of gave that third, a third, a third comment, in terms of the customer response. But is there any pattern on any of those markets in particular.

Gary M. Philbin -- President and Chief Executive Officer

For Dollar Tree?

Karen Short -- Barclays -- Analyst

Yes.

Gary M. Philbin -- President and Chief Executive Officer

Or Dollar Tree Plus! No, I would say, I can tell you, there is a nuance there that really says as much of a difference. I think it's more about the product Karen than anything else at this point.

Karen Short -- Barclays -- Analyst

Great. Thank you.

Operator

And ladies and gentlemen, we'll take our final question today from Matthew Boss with JP Morgan.

Matthew Boss -- JP Morgan -- Analyst

Great. Thanks. So, Gary maybe larger picture, how would you assess the health of the low income consumer today. Any changes to the competitive landscape that you've seen impacting any of your strategies, or is it best to just think primarily that this company specific execution here?

Gary M. Philbin -- President and Chief Executive Officer

Well, listen, we've been building -- rebuilding our execution and rebuilding our banner. So, I think that speaks to satisfying this customer and I think that's what H2 calls out that when we get a shopping environment that's compelling, exciting and has the items they want, they will respond to it. To answer your question on the customer, yes, I think unemployment is at an all-time low, I think folks, in general, can find a job these days. I think the opportunity is still oftentimes, they're one doctor bill or one car repair bill away from not being in such good shape and that's really our opportunity to make sure that we have the right items to help them navigate and budget from beginning of the month to the end of the month. So, I would say, things are maybe slightly better because of jobs. But I never like to stray too far from a customer that is keenly focused on value, convenience and that's the crosshairs of our Family Dollar ought to just win the customer with everything that we've been talking about, with H2 and the entire fleet.

Matthew Boss -- JP Morgan -- Analyst

Great. And then Kevin, maybe just a follow-up on gross margins. At the Dollar Tree banner, so this is the second straight quarter at 55 basis points merchandise costs headwind, net of freight and 10 basis points of distribution pressure. How do these two items, specifically shape up in the fourth quarter? And then do you still view 35% of the structural multi-year gross margin for the Dollar Tree concept?

Kevin S. Wampler -- Chief Financial Officer

Yeah, I think as we look at it, as we've said, we look at freight and fourth quarter said domestic, we feel like we're headed in a little bit better direction could be flat to slightly down year-over-year. So, that's a good news item. Obviously, somewhat offset by the fact that our import freight is going up. So, I think overall, I think we would look for the freight effect maybe be a little less as we go through Q4. I think as we look at just margin in general, obviously, as we've talked about helium is the component of this, it does affect, it does have a halo effect on what is one of our biggest departments, and one of our most profitable departments. And so we feel a little bit of that, but the team is working really hard to create other exciting items within that department that will drive that business, whether we have helium or not, which, obviously, we're working hard to make sure we have helium as well. So some moving pieces there. I would expect though that as if we do the things, we need to execute on improving our freight going forward that you'll see it would be less of an issue as we get into Q4 and the New Year.

Matthew Boss -- JP Morgan -- Analyst

Great. Thanks for the color.

Operator

And this does conclude our Q&A session. At this time, I'd like to turn the call back to Randy Guiler for closing remarks.

Randy Guiler -- Vice President, Investor Relations

Thank you, Eric and thank you for joining us for today's call. Our next quarterly earnings conference call to discuss Q4 and full year results is tentatively scheduled for Wednesday, March 4, 2020.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Randy Guiler -- Vice President, Investor Relations

Gary M. Philbin -- President and Chief Executive Officer

Kevin S. Wampler -- Chief Financial Officer

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Michael Lasser -- UBS -- Analyst

Paul Trussell -- Deutsche Bank -- Analyst

Peter Keith -- Piper Jaffray -- Analyst

Joseph Feldman -- Telsey -- Analyst

John Heinbockel -- Guggenheim Securities -- Analyst

Karen Short -- Barclays -- Analyst

Matthew Boss -- JP Morgan -- Analyst

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